New fiduciary rules aim to protect investors from their financial advisers

Many people have no idea financial advisers are not required to put their interests first. Laws stipulate doctors, lawyers, and CPA’s should put their clients’ interests ahead of their own, but some financial advisers have a looser standard when providing retirement advice. And that may cost their clients a lot of extra fees.

But things are about to change.

Under current regulations, financial advisers are only required to recommend what the industry calls a “suitable investment.” But that doesn’t mean they can’t put clients in the most expensive of all suitable investments.

Later this year, new regulations are expected to require all financial advisers to operate under a “fiduciary standard.” The new regulation will require them to put investors’ interests above their own and will eliminate the suitability standard for many financial products. Some financial advisers already operate under the fiduciary standard.

Unsophisticated investors may be the biggest beneficiaries of the new rule. A White House Council of Economic Advisers study estimated the suitability standard results in annual losses of 1 percent for affected investors. So instead of a $10,000 investment growing to $38,000 over a 35 year period, it would grow to just over $27,500. While most advisers are straight arrows, motivations to maximize commission income can lead to rationalizations to put clients into costly products they would never buy for themselves. The Department of Labor (DOL) aims to eliminate these conflicts of interests with the new rules.

But the changes are not without controversy. Critics contend they will eliminate choices and raise fees for some investors.

“People are not saving enough for future times and the DOL rules will take away options,” said U.S. Rep. Randy Hultgren, R-Ill., a member of the Financial Services Committee.

Hultgren argues the DOL does not understand the industry and believes other agencies are much better qualified to regulate investment advisers. He fears the changes will raise costs, eliminate options, and ultimately harm the people who need trusted advisers.

The Obama administration sent the proposed rules to the Office of Management and Budget last month for a review required before implementation. In the meantime, good stewardship dictates investors find out what standard their advisers are under and what kinds of fees are charged.