New government regulations may mean your advisor has to say “No”.
Back in July, the Department of Labor passed new regulations that will require investment advisors to only make recommendations that are in their client’s best interests on investments held in 401k and IRA accounts. The new regulations will start to be enforced in April 2017. If you’ve grown accustomed to getting what you want, this could make dealing with your advisor a real pain.
In the past, some advisors were only held to a suitability standard. Roughly translated, that might be a situation like “I want to invest in the stock market, and this fund invests in the stock market” so your advisor could put you in that fund. It didn’t matter if the fees for that fund were twice as much as other options available, that the funds’ performance has lagged all of its peers for several years, or that your advisor received a big commission to “help” you. If that’s the one you want, then no problem. But that’s going to be changing.
Going forward, your advisor is going to have to make sure that your investments are in your best interest. That’s called a “fiduciary” standard of care and that means they will be limited to recommendations that a prudent person would make and that are solely in your best interest, not theirs. This could significantly reduce your investment options!
Under a fiduciary standard your advisor may no longer be able to “help” you with those underperforming mutual funds. They might not be able to “help” you with that non-traded REIT that has limited liquidity, unclear market value, and high commissions. They might not be able to sell you that annuity with the high fees and big surrender charges.
In order to fulfill their requirements under a fiduciary standard they’re probably going to have to start asking a bunch of questions in addition to the “what are your goals for the money, how comfortable are you with risk” kind of questions they’ve been asking. They’re going to have to figure out what you need, consider multiple options, evaluate the pros and cons of those different options and they may actually have to say no sometimes.
But don’t despair! As is so often the case with government regulations, there is a loophole. In this case it’s called a “Best Interest Contract Exemption” and it gives you the ability to still do things that your advisor believes are not in your best interest. It’s probably going to be a very long document with a lot of disclosures designed to help you understand why what you’re contemplating doing is not in your best interest, and your arm will probably get sore from all the signing you’re going to have to do, but this is still America and if you really want to do it, you still can. It is after all, your money.
So for those of you for whom dealing with your advisor is about to get more difficult, you have my sympathy. I’ve been operating my business under the fiduciary standard since the very beginning and I know it’s not easy. Not everyone likes to hear, “that’s too risky”, or “the fees on that are too high”. I don’t mean to be difficult, but I agree with this Vanguard study, that suggests one of the main ways I add value for my clients is to help them avoid making bad decisions. I also know that’s not what everyone wants from an advisor.
