When you walk into a financial advisor’s office, you expect them to put your best interests above all else – just as a doctor would and not, say, a car salesman. However, many people don’t realize that the rules financial professionals must follow vary depending on where they work and what products they sell.
One of those federal regulations governing retirement plans just got tougher: The Biden administration announced new rules Tuesday that will require more financial professionals to adhere to the highest standards when providing financial advice on your retirement money.
As of September 23, investment professionals who offer services as trusted advisors must act as fiduciaries, i.e. 401(k)s and similar buckets of tax-deferred dollars. The aim is to minimize conflicts of interest, or at least ensure that they do not influence the advice given by investment professionals, putting a strain on their pockets at the expense of clients. The rule, which will be published in the Federal Register on Thursday, will take full effect at the end of 2025.
The changes issued by the Labor Department, which oversees retirement plans, close loopholes that make it easier for many investment professionals to bypass fiduciary status — such as when workers transfer their savings from a 401(k) plan to an individual retirement account. These transactions, which totaled nearly $800 billion in 2022, were not always covered by these investor protections, even though these amounts often represent a person’s life savings.
“If you are a retirement investor seeking help managing your retirement investments, it is only prudent that you receive prudent and loyal advice that will not mislead you,” said Tim Hauser, deputy assistant secretary for program operations at the Employee Benefits Security Administration in the Ministry of Labor. “It shouldn’t matter what product you recommend, and that’s exactly what the rule does.”
This isn’t the first attempt to update the federal pension law known as ERISA, which was enacted in 1974 to oversee private pension plans before 401(k)s existed. Strengthening its protections has been the subject of intense debate for more than a decade and under three presidential administrations.
Critics (including financial industry stakeholders) say the new rule – originally introduced in October – was rushed, but that the Labor Department has worked on various versions since submitting its first proposal in 2010. The Obama administration issued a stricter rule in 2010 and 2016, but the Trump administration hit the brakes before it was fully implemented. An appeals court later overturned it in 2018.
Agency officials said they considered comments from the financial industry and others and made several changes that are reflected in the final rule. But Lisa M. Gomez, assistant secretary for employee benefits security, said investor protections remain in place. “There is nothing in these clarifications or changes that could be interpreted as a weakening or actual change of position on the proposal,” she said at a news conference.
When individuals have the responsibility to save and invest for a financially secure retirement, with money to last into old age, protecting investors is paramount. Still, individuals may wonder why they are not entitled to fiduciary advice on all of their money at all times, regardless of what account it is in or what type of product they are investing in.
Here’s an overview of how the rules have changed and what that means for you – and how to find trust-level professionals, regardless of the political climate.
What has changed and where do these rules apply?
The regulation redefines who is considered an investment fiduciary. Before the changes, financial professionals had to pass a five-part test before being held to this standard – and one part stated that the person making the recommendation must give the advice on a regular basis. This means that one-time recommendations were not necessarily included, putting the 401(k) rollover guidelines at risk.
The new rule aims to level the playing field for all financial professionals – including investment brokers and insurance salespeople – who identify as trusted advisors when advising on your retirement money. It doesn’t matter whether they recommend mutual funds, stock investments, insurance products such as annuities or illiquid real estate investments – everything is covered. Investment brokers who sell retirement plans to companies would also be subject to fiduciary standards.
Why is fiduciary status important? What does it even mean?
Fiduciaries under ERISA must follow strict rules of conduct and avoid conflicts of interest. This means they cannot provide advice that impacts their remuneration unless they meet certain conditions to ensure investor protection. This includes introducing policies to mitigate these conflicts. Investment professionals also need to be open with clients about their role as fiduciary – if they have conflicts, and many do, they must confirm their fiduciary status in writing.
That should go a long way toward helping retirees who end up in their offices, said Joe Peiffer, founding partner of Peiffer Wolf Carr Kane Conway & Wise, a law firm in New Orleans. He said he has represented thousands of investors who received poor advice, including from insurance salesmen who describe themselves as financial advisors when selling indexed annuities and universal life insurance – often with “disastrous” results.
“This is exactly the type of case the new DOL rule seeks to address,” he said, referring to the Labor Department. “Because when we currently sue these ‘advisors,’ their response is that they are nothing more than insurance agents who have no duty of loyalty.”
I want to work with someone who can do that always Act in my best interest all from my money, not just retirement accounts.
No financial advisor is completely conflict-free, but the ecosystem in which your advisor works is important – and influences what types of conflicts are embedded in the way they do business. For example, some brokers may receive more money for selling one product than for selling another product. Or, if a mutual fund company makes payments to a brokerage firm – and some funds may pay a company higher fees than others, the company itself may have complex revenue sharing arrangements.
Under the new rule, any financial professional making recommendations must have “policies and procedures in place to manage conflicts of interest and ensure that providers follow these policies,” department officials said.
The easiest way to purchase advice is to hire a fee-only, independent, certified financial planner who is a registered investment advisor, meaning they must act as a fiduciary when providing investment advice on securities (stocks, mutual funds, and the like). granted. . As part of this duty of loyalty, they must resolve or disclose conflicts.
“Your likelihood of conflict increases the longer the disclosure takes,” said Benjamin Edwards, a professor at the University of Las Vegas William S. Boyd School of Law.
What questions should I ask when choosing an advisor?
There are several, but the most important: Are you a fiduciary who promises to put my interests above yours 100 percent of the time with 100 percent of my money? How do you get paid – and do you get paid more for choosing one investment over another? What is your investment philosophy – is it primarily low-cost, index-based investing?
Oh, and by the way, will you sign this trust obligation? If they refuse, find a new advisor who will.
Where can I find a trustworthy advisor?
There are more places now than there used to be: XY Planning Network, Garrett Planning Network, and the National Association of Personal Financial Advisors (NAPFA) are all industry groups whose members only accept fee-based compensation, which minimizes their conflicts of interest. They also allow you to search for professionals based on their expertise (e.g. retirement planning or stock option exercise strategies). “You don’t want the advisor to learn on the fly how to help you,” said Alan Moore, financial planner and co-founder of XY Planning Network.
There are also newer providers, including Domain Money and Facet, that connect people with independent financial planners who receive flat fees.
Roboadvisers, or companies that rely heavily on technology to manage your investments but often also have human financial advisors, can be a good option for people who are just starting out — or have an investing plan that they want to implement and keep on autopilot.
One of the most valuable services an advisor can provide is to save us from ourselves in the darkest market moments, when an individual is most likely to give in to their emotions and sell (or buy) investments at the worst possible time. Just make sure the advisor is a fiduciary.
Source link
2024-04-23 18:00:26
www.nytimes.com
