When you’re planning for retirement, you often have to reach out to a financial professional to get expert advice. Investors want to ensure that the advice they get is sound and focused on their best interests. In the past decade, consumer advocates and lawmakers have been debating with the financial services industry about a need for mandated consumer protection in this arena, referred to as the fiduciary standard. Here are the things you need to know about this standard as an investor.
What It Is
The fiduciary standard is the idea that financial advisors working with investors must put their client’s interests above everything else. It’s a big part of the consumer and professional relationship and helps investors know and trust their advisor. It’s used to prevent financial advisors from pushing bad investments onto their clients that could reward the advisor with high commissions and other incentives.
Federal Regulations
The financial services sector has mostly regulated itself in many cases in regards to the fiduciary standard. The Department of Labor monitors investing and retirement account practices with the 1974 Employee Retirement Income Security Act. Since the act’s passage, there have been many amendments made to help ensure consumer protection when dealing with financial investment firms and advisors. When the law was first passed, retirement planning was mainly centered around employee pensions and company benefits. Today, retirement saving is more individual.
Fiduciary Rule
In 2016, President Obama and the Department of Labor made changes to the ERISA law to dictate that financial advisors and brokers must act as fiduciaries. Consumer advocates applauded the changes, but many lobbyists and high-profile investment firms fought the regulations, delaying the enforcement of the law for two years. In 2018, when the law was scheduled to go into effect, the Fifth Court of Appeals in New Orleans struck down the mandate, stating it was unreasonable to the industry.
Future Protections
With the current administration in place, it’s unlikely the Department of Labor will draft a new version of the fiduciary rule. Now, the SEC is working to draft new regulations that are less stringent on the industry. A variety of fiduciary rules have been considered by the financial regulatory agency. The current language for a fiduciary rule has been put together in the Regulation Best Interest.
Industry Governance
In the time being, while there is no federal regulation in effect and the SEC’s standards aren’t official yet, the financial services industry may be considering their own standards. Private fee-based financial advisors and brokers are now having to compete for business. Investors are now opting for more independent investing and using apps to determine their financial future instead of working with a human. If the industry wants to stay relevant, it’s got to offer something more than the app.
State Efforts
It’s also possible that individual states will pass legislation of fiduciary rules and help keep investors protected. In Maryland, New Jersey, New York, and Illinois, laws are being passed that provide the protection promised from the DOL’s original fiduciary rule. For these investors, they can trust that their best interest is being promoted instead of their financial advisor’s own portfolio.
Consumer Education
The biggest lesson from the history and saga of the fiduciary rule is that consumer education is key. It’s important for investors to take the time to do their homework about what goals they want from their financial portfolio and how they can achieve their goals. It’s not wise to simply trust all of your money is being used effectively when you invest. Investors must be proactive and ready to take charge of their own wealth management.
Even though the fiduciary rule is not the standard, investors can still take steps to ensure their wealth is protected. It’s important to understand the rules and regulations of the industry and know what your investment products are if you’re planning for retirement.