Beat the heat: Don’t get burned by bad advice (Part 1)
As temperatures continue to heat up around the country, the battle for a uniform fiduciary standard in the financial industry is also making headlines with the Department of Labor’s recent passing of its “fiduciary” rule. This will require all retirement advisors, including brokers and insurance agents, to put their clients’ best interests ahead of their own profits. As our company has always been committed to transparency as well as education to help our clients make informed financial choices, this week we share our views on what you can expect from the passing of this new legislation.
While some financial professionals already work as fiduciaries in all financial capacities, including our team at Lang Capital, others have existed under a less stringent, “suitability” standard. According to the DOL, this suitability standard allowed for backdoor payments and hidden fees that hurt consumers. A White House Council of Economic Advisors analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total.
Labor Secretary Thomas Perez stated on the day of the announcement, “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.”
While the DOL released its ruling on April 8 of this year, the first changes will go into effect April 2017 and all of them will be in place by January 1, 2018. As these adjustments occur, what will it mean to consumers? The following are key changes that will be going into effect with the conflict of interest rule next year.
The Fiduciary Standard
As stated, the DOL ruling enacts that financial professionals offering retirement advice must be a fiduciary and they must work in the best interest of the client, regardless of how that impacts their own profits. However, consumers need to realize that taxable investment accounts are not affected by the new rule. For instance, if you want a broker to purchase stocks for you in a non-qualified account, those investments would not fall under the DOL ruling, therefore, are not necessarily being recommended by best interest standards.
With more regulation comes more paperwork. Although consumers will have advisors working in their best interests due to the DOL ruling, they can also expect additional paperwork in their email and mailbox as the changes come into play.
The Best Interests Contract (BIC) agreement between advisor and client is perhaps the most important document that clients will be signing upon implementation of future financial recommendations for retirement accounts. BIC is the document stating the financial professional agrees to a fiduciary standard with the client and commits the advisor to working in the “best interests” of the client, earning “reasonable compensation,” and providing appropriate disclosure and transparency about the products and compensation involved.
The Best Interests Contract (BIC) exemption is intended to provide some relief for advisors and financial institutions to permit the use of many of their current compensation models as long as they acknowledge their fiduciary status and are transparent about the transaction. BICE can be used for any assets and products offered to retirement plan and IRA investors, as long as the advisor is providing non-discretionary advice.
For more tips on qualifying your financial professionals and protection measures before this new ruling goes into effect, check back for part 2 of this series early next month. In the meantime, our team is here to provide comprehensive fiduciary planning and advice for all of your financial needs. Give us a call at (803) 547-7853 for our Charlotte office or (843) 757-9400 for our Hilton Head office today to request a consultation to learn more!