When the Obama administration released its new investing regulations aimed at protecting retirement savers from conflicted advice, its name – "fiduciary rule" – doubtless flummoxed some.
But behind the clunky term are new standards that could give you clearer information when making decisions about your retirement nest egg.
The final phase of the rule doesn't take effect until Jan. 1, 2018, and it will doubtless face criticism and attempts to change it before then. Among other things, some financial services associations say the rule may force them to stop serving smaller investors — a claim disputed by the rule's supporters.
Nonetheless, now that it's out, here are some things you need to know:
If you already work with an advisor who follows the "fiduciary standard" and puts your best interests first, nothing should change. But not all advisors currently adhere to that standard. Brokers, for example, are under no obligation to act in your best interest when it comes to personal retirement investment advice. As long as an investment is suitable for a client, the broker is free to recommend it, even if its chief merit is higher commissions or other payments for the broker.
Under the new standard, brokers will be required to act in your best interest. They can still try to sell you high–commission investments, and even their own firm's products, but only if they can demonstrate that the investments are the best ones for you.
As these regulations do not take effect until April 2017, you may not see any immediate change. So by all means, ask your broker what standard they use to advise you on retirement investments. Be aware that for the next several months, they may not be required to act in your best interest.
The new rules cover your retirement savings, but nothing is changing regarding your nonretirement accounts. Your broker is under no new obligation to put your interests first for your taxable accounts.
"You could have a broker and two different accounts, one retirement and one basic investment savings, and they are going to treat you differently apparently based on the nature of the assets," said Kurt Schacht, a managing director at the CFA Institute, an association of investment professionals and a supporter of the new rule.
It is not yet clear how brokerage firms will communicate the different standards when clients have both taxable investments and retirement accounts. So make sure you ask your broker about the basis for any investment recommendations for any of your accounts.
The new rule applies to personalized investment recommendations, but not to general investment education. And the Labor Department's definition of investor education is relatively broad.
"Education as defined in the rule will not constitute advice regardless of who provides the educational information, the frequency with which the information is shared or the form in which the information and materials are provided (e.g. on an individual or group basis, in writing or orally, via a call center or by way of video or computer software)," according to the Labor Department's guidelines.
Your financial advisor may have recommended investments in the past that may have been suitable but came with high fees, or subpar performance, or both. If you like those investments, you can keep them under the new rule, though your advisor may have to provide more disclosure about the costs.
You can also invest in more assets with high fees and the like if that is what you want to do (but your advisor will probably have to disclose more information about what they entail).
In a word, yes. The rule allows investment advisors to sell certain types of annuities, provided they are in a client's best interest.
Wrong. The new rule applies to investment advice provided when people transfer money from a workplace retirement plan to another retirement account. And if you participate in a 401(k) or similar plan at work, you will be making choices about what to do with that money if you take another job, like whether to roll it over into an IRA and how to invest that money if you do.
Often, "the biggest, most important lifetime money decisions an individual is going to make will be on rollovers," said Nancy LeaMond, executive vice president at AARP, which advocates for older Americans.
It's hard to tell, since the way you will pay your investment advisor may be changing. You will be less likely to pay commissions for specific investments and more likely to pay a fee based on something like the amount of assets your advisor is handling for you.
Critics have charged that the new rule could actually raise costs for people with smaller accounts, or make it unprofitable for some advisors to provide services to those investors, leaving people of more modest means without personalized investment advice.
But the Certified Financial Planner Board of Standards several years ago adopted a similar standard to the Labor Department's for its members, and profits and ranks have grown since then, said Marilyn Mohrman-Gillis, head of public policy for the CFP Board of Standards.
"The [retirement savings] rollover market is $300 billion a year. The notion that advisors are just going to be walking away from providing advice regarding assets in IRAs defies credibility," she said. "For both compensation models this is viable, whether there is a fee, fee only, commission based, or a combination of fee and commission."