Federal lawmakers debate the future of financial planning
There are plenty of debates happening on Capitol Hill that could have a significant impact on your finances. Still, while healthcare and tax reform make headlines, the future of financial planning is less covered but no less important. Here’s what you need to know…
What is the fiduciary rule?
The Fiduciary Rule is a federal regulation created by the Department of Labor under President Obama. It basically says that financial advisors must serve in a fiduciary role; that means they must act in the best interest of the client. The intent was to end the practice of financial advisors driving clients to products based on the commission they earn. It specifically targets retirement investment advisors.
Before June 9, 2017, when the law officially went into effect, many financial advisors were bound by “suitability.” Suitability is a less strict standard; it states as long as an investment meets a client’s needs and goals, it’s appropriate to sell. The Fiduciary standard is stronger because it means advisors must always direct a client to the best product possible.
Why is the fiduciary rule bad?
While the rule may be well-intentioned, opponents argue that it actually ends up hurting Main Street investors. The argument is that the regulation will end up costing retirement savers more in additional fees. It could end up costing Americans up to $13 billion in additional fees, according to one estimate.
Here’s the problem. Direct investment is one tool a brokerage offers that allows a saver to enjoy minimal fees. Instead of dividing the investment of your 401(k) or IRA into outside mutual funds, they go into funds from that brokerage. Taken literally, the fiduciary rule prohibits this, because the broker drives you to their own fund. It violates the new regulation.
But brokerages say this prohibits them from offering the most affordable, low-fee products to clients. Instead, they have to drive savers into funds with higher fees, costing people more.
The Department of Labor under the Trump administration delayed the implementation of the law, but they didn’t stop it. There are strong calls to remove the regulation. And critics aren’t saying there shouldn’t be any oversight of financial advisors. They just don’t think this regulation got it right.
Why this matters to you
This debate matters for everyday Americans. It determines what kind of advice you get when it comes to investing your retirement funds. Additionally, it determines how much you pay for those services. What hangs in the balance is you’ll be able to get retirement fund investment advice moving forward.
This is an especially important conversation for anyone in the process of eliminating debt. One of the benefits of becoming debt free is you gain the ability to effectively save for the future. A large portion of your saving focus should be on your retirement.
Let’s face it. Most average people don’t know how to invest their retirement contributions on their own. You usually depend on a financial advisor to tell you the best places to put your money. However, you also want to avoid high fees that can drain the money you earn.
For now, the regulation in place holds brokers to the highest standard. If they have a vested interest in a product that they promote to you for investment, they must disclose it. That means they’re supposed to tell you if a commission structure will give them a kickback.
In the end, you just need to talk extensively to the person that you’re trusting to help your money grow. Don’t be afraid to ask questions. Know how fee structures work and if low fees are your goal, make that clear. Just make sure to invest in your retirement and be engaged with the process. You can’t afford to avoid it, because you definitely need it.
Learn more about how to invest in your retirement, visit Consolidated Credit’s Debt-Free Retirement Planning Guide. You can also watch our free on-demand webinar:
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