If you haven’t heard of the new conflict of interest rule, or fiduciary rule that the Department of Labor has now enacted this week, buckle up. This new rule expands the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). With the passing of this legislation, it will automatically elevate all financial professionals who work with retirement plans or provide retirement planning advice to the level of a fiduciary. Meaning, essentially, that your advisor will have to work for you with your best interest at heart, not their own.
Why was there a need for this rule?
Reports have come out in recent years that retirement advisors have lined their pockets with an estimated $17 billion a year with cash. Cash they earn off of steering their customers into particular investments. So making sure their customers made a great return on these investments wasn’t their objective. Advisors accepted commission style bonuses, cars, and other incentives. Obviously, this was only a detriment to the American people.
That’s where this new rule comes into play. The former head of the DOL, Tom Perez, Senator Elizabeth Warren, and others from the Obama administration conceptualized this rule. Senator Warren posted the following video on June 9th, going over the rule.
As a result of the new fiduciary rule in place, $17 billion dollars is staying in the hands of the American people. So what’s next?
Will this impact you?
The short answer is, probably. And in a positive way. Saving for retirement is difficult enough without having to worry whether or not your advisor is doing what’s best for you. A fiduciary is a higher level of accountability. And that, in turn, raises the standard that was asked of the financial world, like planners, brokers, and insurance agents, who specifically work with retirement plans and accounts. As long as an investment recommendation met a customer’s need and objective, it would be deemed “appropriate”. So the passing of this law, financial professionals are legally obligated to put customers’ best interests first. Consequently, The new rule could eliminate many commission structures that govern the industry.