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Can You Trust Your Financial Advisor?

Update: On March 15, the 5th U.S. Circuit Court of Appeals struck down the fiduciary rule. In a 2-1 vote, the court ruled that the Labor Department had overstepped its authority when it wrote the rule. However, the fate of the fiduciary rule is not yet final, as the Labor Department could ask the court to revisit its decision or the case may make its way to the Supreme Court.

Back in 2015,  former President Barack Obama proposed the fiduciary rule. This rule is a financial industry reform aimed at making it easier for you to know whether you can trust your financial advisor. The rule would require all financial advisors to have a “fiduciary duty” to their clients. In essence, a duty to protect their clients’ money and to put their clients’ interests ahead of their own. This change likely would result in a drop in high-fee, low-return investments – undoubtedly a good thing for consumers.

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But shortly after President Trump took office, he put the Obama-era proposal on ice. In August, the U.S. Department of Labor requested to put major parts of the fiduciary rule on hold for 18 months to give firms more time to make necessary adjustments. The request was approved. Wall Street now has until July 1, 2019 to prepare for the incoming rule changes.

What the Fiduciary Rule Would Do

The proposed reform would impose a fiduciary duty on any advisers who handle retirement accounts or sell investments for retirement accounts.  The rule categorizes traditional and Roth IRAs, 401(k)s and health savings accounts as retirement accounts.

The proposed reform applies mostly to stockbrokers and others who sell commission-based investment vehicles. There is currently no rule in place to keep certain financial professionals from putting their own interests ahead of their clients’ retirement prospects. While SEC-registered financial advisers already have a fiduciary duty to their clients, those who aren’t registered with the SEC do not. Broker-dealers, stockbrokers and insurance agents are only required to fulfill a suitability obligation. This means they must offer suitable recommendations to their clients, but they aren’t obligated to put their clients’ interests first.

The fiduciary rule’s changes were proposed on the heels of a study by the White House Council of Economic Advisers that found that a segment of the country’s financial advisers were costing their clients billions. By pushing high-fee, low-return investments on their clients, these advisers pocketed an annual $17 billion that could have gone to clients’ retirement accounts. Ouch.

Wall Street’s Objection to the Fiduciary Rule

trust your financial advisor

The plan to eliminate the loopholes that allow for conflicts of interest between brokers and their clients has provoked a predictable backlash.

If the rules change, firms that thrive on the high-fee commission model will have to change their ways and compete with the low-cost index funds of the world. The Labor Department estimates that it could cost firms up to $31 billion over the next decade to comply with the fiduciary rule.

The industry argues that the rule could open up the floodgates for lawsuits, drive up costs for consumers and cause clients with limited savings to be dropped by firms. In addition, the industry, which argues the rule is complex and costly, contends that it may also limit clients’ investment options.

How To Tell If You Can Trust Your Financial Advisor

Since the Obama-era fiduciary rule likely won’t take full effect until July 2019, what can you do in the meantime? One easy way to ensure you’re working with a trustworthy financial advisor is to choose a professional who is already required to act as a fiduciary. Financial advisors who are registered with the SEC are required to have a fiduciary duty to their clients. It’s those who aren’t registered with the SEC, particularly stockbrokers, that are not required to be fiduciaries.

Also be cognizant of advisors’ certifications. An advisor who is a certified financial planner (CFP), for instance, must abide by the fiduciary standard. If you’re unsure, the easiest way to find out if an advisor is a fiduciary is to ask directly. An advisor should be able to provide you with a fiduciary oath that they’ve taken.

The Takeaway

trust your financial advisor

As of October 2017, the SEC is working on drawing up a proposal for the fiduciary rule. That means consumers will have to keep taking matters into their own hands until at least July 2019. While lawmakers continue to debate the Obama-era fiduciary rule, consumers must continue to do their homework and monitor their accounts. Check your annual returns and analyze the fees you are paying. If you’re not happy with what you see, it may be time to start shopping around.

Tips for Vetting a Financial Advisor

  • In order to vet a financial advisor, you’ll need to find one first. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Do your research. Look at a financial advisor’s qualifications. Find out if he or she is registered with either the SEC or the state securities agency. Check to see if the firm or advisor has any disclosures.
  • Make sure you understand the fees. Ask for a full disclosure of the financial advisor’s fees. This is also available on the firm’s Form ADV (SEC-filed paperwork).

Photo credits: ©iStock.com/sanjeri, ©iStock.com/AndreyKrav, ©iStock.com/Georgijevic

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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