Recently the Department of Labor announced new legislation that will have a profound impact on the financial services industry. What is refreshing is that the focus is on the individual investor, protecting their retirement accounts from predatory practices that have unfortunately become the norm on Wall Street. The new regulations will help protect individuals, and in many cases, open their eyes to what has been unfortunately taking place with their accounts for years.
While the document that addresses the new guidelines is 1,023 pages long, what it addresses at its core is that financial advisors must act as a fiduciary when working with qualified accounts. It is estimated that investors will save $17 billion a year after exorbitant fees and charges are eliminated! It has been well documented that we have a ‘retirement crisis’ as the average U.S. consumer is not saving enough for their retirement. Hopefully the focus and legislation we’re starting to see will give people more confidence to save and invest.
The legislation focuses on advisors that offer advice on qualified accounts (IRAs, 401(k)s, 403(b)s, Simple and SEP IRAs) and requires that they must act as a fiduciary. This means that advisors must do what is in the client’s best interest and put them ahead of their own. Sounds like common sense, right? What might shock many investors is that the ‘trusted’ advisor they have worked with for years might be anything but a fiduciary, many of them viewing their client’s assets as a revenue-generating machine lining their own pockets and financing their extravagant lifestyles.
“With the finalization of this rule, we are putting in place a fundamental
protection into the American retirement landscape. A consumer’s
best interest must now come before an advisor’s financial interest.
This is a huge win for the middle class.”
Tom Perez, Labor Secretary
The new acronym that will become common in 2018, when all advisors must be compliant with the regulations, is ‘BICE’ – Best Interest Contract Exemption. To put it in plain English, advisors must put in writing that they will act in their client’s best interest and only earn “reasonable” compensation with full disclosure of fees and disclose any conflict of interest that might exist. These new requirements should drastically slow down high-commission products like annuities and loaded mutual funds. It is not uncommon for an advisor to make a commission of 8% or more on an annuity and you don’t have to look far to find funds like American Funds that have a front-end load of 5.75% and a yearly management fee as well.
Step back and look at those fees for just a minute…in a challenging and sluggish market environment (like today) those are the type of returns that investors would appreciate in their retirement accounts; unfortunately unscrupulous fee arrangements act like a performance anchor on their accounts and line the pockets of someone else!
“What consumers crave is transparency.
This rule puts the consumer in the driver’s seat.”
Mitch Caplan, CEO Jefferson National
It took over six years for this legislation to become reality and we applaud those that stood up and fought for what is right and fair for investors. The new rules will be fully implemented January 2018, until then companies need to decide how they will adjust their business models to comply. Just in the last month we’ve started to see significant moves like when Charles Schwab announced that they will no longer offer mutual funds that carry a sales load and higher expenses. Firms like Edward Jones, LPL Financial, Raymond James and Ameriprise Financial will have to determine if they can be compliant and meet their client’s needs while still following the new codes. One concern from the new rules is that individuals with smaller accounts will be forced to find new advisors. We would argue that these investors will be rewarded in the long-run with lower fees for what might be a short-term inconvenience.
We wrote a year ago about the efforts that the Department of Labor was attempting to pass (click here). Far too often politicians have taken the money offered by lobbyists and supported the archaic and predatory fee structures that have existed on Wall Street for decades. As many firms attempt to restructure their systems and policies there is one group of companies that stand as true winners with the new rules…Registered Investment Advisors or RIAs.
Firms that are structured in this manner already operate under a fiduciary model and will
have to make very minor, if any changes, in how they operate. We are proud that My Portfolio Guide, LLC is a Registered Investment Advisor and specifically chose this platform in order to truly be independent and transparent for every client we work with. Both Matthew Pixa and Matthew Blake have worked for firms that will have to go through radical changes if they want to continue to work with their client’s retirement accounts. If you have questions or concerns about how your accounts are currently being managed we encourage you to contact us.