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How the new 'fiduciary' rule will actually affect you

Changes are ahead for your investments and your IRA.

401K IRA
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A new rule is about to shake up your retirement accounts and the relationship you have with your advisor.

On April 10, 2017, the Department of Labor, the federal agency that oversees retirement plans, enables its so-called fiduciary regulation.

Starting on that date, broker-dealers and financial advisors will be required to provide advice that is in your best interest. It may seem surprising that wasn't always the case, yet the White House Council of Economic Advisers says conflicts of interest by investment advisors leads to $17 billion in lost income every year for most savers.

Retirement accounts are a big business for advisors, broker-dealers and the institutions that hold and invest your savings. As of the end of the second quarter of 2016, IRA assets totaled $7.53 trillion, according to the Investment Company Institute.

"The Department of Labor has done what the Securities and Exchange Commission is unable to do: create an enforceable best interest standard and rein in conflicts that aren't in the best interest of the investor," said Barbara Roper, director of investor protection at the Washington, D.C.-based Consumer Federation of America.

"While there may be some hiccups along the way in terms of implementation, the ultimate outcome is better advice and lower costs," she said. "We are already seeing that."

Financial services firms are preparing their businesses ahead of the rule. For example, Merrill Lynch recently announced that it would stop offering new commission-based IRA brokerage accounts through its advisors as of the April date.

Instead, clients will have three options for retirement-related investment advice: They can work with an advisor on a fee-basis, where he or she will be paid a percentage of assets invested. They can also use commission-based, self-directed brokerage accounts, or Merrill Edge Guided Investing, a fee-based robo-advisor option that will start early next year.

Here is what you can expect to see happen in coming months.

How will the rule affect my advisor relationship?

First things first: This rule does not affect regular brokerage accounts. It's applicable to retirement accounts — IRAs — and the advisors who handle them.

If you are already paying flat fees or a percentage of assets managed, rather than commissions, very little may change in your relationship.

However, if your advisor has been receiving commissions, expect to get a pile of paperwork from him or her, said Marcia S. Wagner, managing director at the Wagner Law Group in Boston.

In that case, if you have an IRA, this paperwork will include the "best interest contract," a document that states that your advisor and his or her firm will act in your best interest — as a fiduciary. This contract will require any conflicts of interest to be disclosed.

You will also be notified of legal remedies available to you.

Finally, you will also receive details on the services your advisor will provide and the associated fees you will pay.

"[Under the rule], the advisor can't receive more than reasonable compensation," said Fred Reish, a partner at Drinker Biddle & Reath. "The more services he provides for the investor — if the investor wants it — the more those services are worth."

Is this the end of commission-based service?

No. The new rule doesn't end commissions for everyone.

The "best interest contract" allows your advisor to continue receiving these payments, provided his firm meets certain conditions.

This includes ensuring that advisors don't receive incentives for acting against your interests, such as steering you to a particular mutual fund or annuity just because they get paid more for it.

Some firms are tweaking their compensation models in anticipation of this requirement. For instance, broker-dealer LPL Financial announced this summer that it would standardize advisors' commissions on mutual funds and variable annuities.

Your best interest contract will have more details on these types of arrangements, their associated fees and how your advisor's firm will mitigate those conflicts of interest.

"If the service is commission-based, the retail investor will get more information on the various forms of compensation that the broker-dealer and advisor have received," Wagner said.

That disclosure will also bring to light other forms of compensation that the broker-dealer and advisor can get, which may be an eye-opener.

"The retail investor might have thought things were just commission-based," Wagner said. "They won't know that it's also revenue sharing, sponsored conferences, and 12b-1 fees."

Will my fees go up?

It depends.

Some fund providers are cutting fees to help advisors make the transition to comply with the regulation, as consumer advocates and even the White House have pointed out how higher fund expenses in IRAs can eat away at returns. BlackRock slashed costs on 15 ETFs in early October. Other fund firms have also trimmed expenses.

Whether your advisor will charge more, however, will vary.

"There is some debate in the industry that if a firm wants to move a client to a fee-based account as opposed to a transactional cost from commissions it could cost the investor even more," said Duane Thompson, senior policy analyst at fi360, a Pittsburgh-based provider of fiduciary-related education.

Going forward, fees will likely reflect the service you seek. "If you really need a higher cost, actively managed model, then you should ask for it," said Reish of Drinker Biddle.

"If you want to do the research yourself, but you want a second opinion, then that should be lower cost," he said.

Some firms might also be inclined to offer clients a robo-advised option.

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What will happen if I roll over my 401(k) to an IRA?

Expect your advisor to provide you with more documentation as you shift assets out of a company-sponsored retirement savings plan.

"For anyone to recommend that a 401(k) participant take money out of a plan and roll into an IRA, they will have to consider the participant's situation and needs and make a best interest recommendation," said Reish.

Your advisor has to demonstrate a comparative analysis of the investments available, expenses and the service available in the plan versus in the IRA, he said.

Be vigilant as the effective date of the new rule approaches.

"There is a generous grandfather clause in the rule," said Roper of the Consumer Federation of America.

"At less-scrupulous firms, there could be an inclination to get things done before next April, including making rollovers that aren't in your best interest," she said.