A breath of fresh air has wafted over the financial services community as the Department of Labor’s new fiduciary rule has clicked into place, in spite of all the kicking and screaming by the industry. Empty claims of “extra expense of compliance” and “loss of cost-effective advice” have mercifully fallen on deaf ears.
Bear in mind, the term “fiduciary” defines someone who makes financial decisions and recommendations “in the sole interest of the beneficiary of the trust.” Any advisers receiving income as they offer advice or recommend investment products to a retirement account (which is money in a trust) are now deemed to be fiduciaries and must recommend what is in the best interest of their clients — or be subject to lawsuits. Until now, their advice only needed to be “suitable” — a directive that meant different things to different advisers. The telephone boiler room depicted in the movie “Wolf of Wall Street” painted a picture of the limitations of the word “suitable,” and only the most egregious were ever shut down by regulators.
The new regulation is a game changer. It means that an adviser or broker cannot recommend an investment product that pays a higher fee (to the adviser) than a comparable product that is cheaper. Simple enough. The industry is adjusting and moving toward flat advisory fees typically in the range of 1 percent per year based on assets under management. So, this is an improvement because no single investment offers the incentive of paying more income to the broker or adviser. The mutual fund industry is moving toward funds that pay no commissions whatsoever, so the adviser or broker will be sending a bill…
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