Home Radio Segments Guest Segments The New Fiduciary Rule Will Bring Your 401(k) Into The Light

The New Fiduciary Rule Will Bring Your 401(k) Into The Light

Douglas Harbrecht, Fiduciary Rule

With Douglas Harbrecht, Director of New Media at Kiplinger.com

Because not all financial advisors operate under the same ethical standards as a fiduciary, the Department of Labor has proposed to Congress a new set of regulations designed to protect the investor saving for retirement.

Doug Harbrecht, Director of New Media at Kiplinger.com, wants every investor to understand the importance of vetting his or her financial advisor since this is the person who stewards your money and has your retirement future in his hands. The Department of Labor, Doug says, may face heavy opposition in Congress over these proposed rules because, if passed, every financial professional will be held to the same standards as a fiduciary. The important distinction is that a fiduciary is required to operate solely in the client’s best interest and not, as is often the case with non-fiduciary advisors, to garner the most commissions by pushing products that are just okay, that are suitable, but not the best options for the client. The intention is to eliminate the salesperson aspect of the financial industry.

Whether or not the Department of Labor is successful in its endeavor, Doug encourages every investor to be pro-active in selecting a financial advisor by asking the question, “Are you a fiduciary, a registered investment advisor?”  If the answer is no or if you get a rope-a-dope response, move on.

Many financial advisors who are fiduciaries work on a fee-only basis and, in addition, will tend to put you into a balanced program designed solely to meet your retirement goals.

The importance of having a trusted and open relationship with your financial advisor cannot be over-stated. It’s your hard-earned money, and you deserve the most financially rewarding and secure retirement available to you.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

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Steve Pomeranz: New rules abound designed to help the investor.  That’s the headline you are seeing more of if you pay any attention to the investment world.  What are the rules and how do they protect you?  With me is Doug Harbrecht, Media Director at Kiplinger.com.  Hey, Doug, welcome to the show.

Doug Harbrecht: Hey, Steve.  Nice to be here.

Steve Pomeranz: The Department of Labor aims to keep bad investments out of people’s retirement accounts.  How do they propose to do this?

Doug Harbrecht: They’re raising the bar on investment advice that is provided to retirement savers, not all savers and not all Americans, but those who are saving money for retirement.  Basically, this new rule would say that, essentially, anyone providing investment advice on a retirement account for compensation—for fees or commissions or whatever—they must act as what’s called a fiduciary.  I know that word may put people to sleep but what it means, in essence, is that the advisor has to put the investor’s interests first, ahead of his or her own, that the saver’s interest come first.  What that differentiates it from is that for brokers who just try to sell you a product, whether it be an insurance product or whatever and they only have to make sure that it’s suitable to your needs.  They don’t have to be looking out for you. They just have to make sure that it’s suitable for your needs.

Steve Pomeranz: If someone recommends something that may pay them a higher commission, it still might be suitable to their needs, but it’s not really under the fiduciary standard where your needs and future come first. So it’s a much broader definition, and I would say to our listeners here that anyone who is using investment advice or looking to seek investment advice should know the difference and should know the term fiduciary because that is a much higher standard.  Doug, you would think that anyone charged with giving such important advice would adhere automatically to a strict higher standard, but that’s not so.  What is the brokerage world like these days and why was this needed?

Doug Harbrecht: You would think that. I have thought about this a lot.  It really comes down to an interesting philosophical discussion in the financial advice industry, which is to say, is financial advice a profession?  So in other words, is there a financial advisor, are they like accountants, are they like your lawyer, are they like your psychiatrist, or is this merely a sales gig.  They are there to sell you like an automobile, like somebody, you walk into an auto showroom, you think you want to buy a Chevrolet and the salesperson puts you in a Cadillac because it’s suitable for you and it’s a good product, and they’ve convinced you that it’s a good product for you, but they earn more money off of it.  That’s why they want to get you in that Cadillac.  It’s a very, very interesting difference of approach and what the Department of Labor is saying is, look, when it comes to somebody’s retirement savings, you’re going to act in their best interest.  You’re not going to act like a salesperson.  You’re going to act in their best interest.

Steve Pomeranz: Has the financial industry supported or resisted these rules?

Doug Harbrecht: No, the financial industry has been fighting them tooth and nail.  There’s still some talk that there might be an effort to block this in Congress, the House or Senate.  Those who are pushing the rule in the financial advice industry are registered investment advisors and that’s one thing that your listeners should…that’s a question you should always ask first of any financial advisor is, “Are you a registered investment advisor, RIA?” They’re required by law, that’s one group of advisors that is required by law to put your best interests first, brokers are not.  Many financial advisors are not.  It’s a question you really should ask any financial advisor you’re dealing with.

Steve Pomeranz: Briefly, I started in the investment business in 1981 and really quite honestly I was trained as a salesman to sell anything and everything and sell what you could.  Years later I got sick of that and very early on, 1996, I actually became a full-fledged registered investment advisor to adopt that fiduciary standard and that was a long, long time ago, so I got out of the gate really quite early on that.  The financial industry has an argument that imposing these rules is going to force less affluent savers out of the market for advice.  Do you buy into that?

Doug Harbrecht: No, anyone can go to a financial advisor for a one-time fee-only session at any point in their life, at any stage in their life.  I went to a financial advisor about 8 years ago when I was starting to approach thinking seriously about retirement.  It’s a one-time fee, but in that session, they’re required to look out for you.  That’s what you would want to do.  I don’t buy that argument.  The commission approach where an advisor is managing your money and deriving a commission from trying to produce the best results, that’s primarily for really wealthy people and that gets into some complicated stuff.  I don’t see the converse happening here, though, that poor people will be forced out of the time of the cost of a one-time session and advisor.  Do you agree?

Steve Pomeranz: I totally agree.  The idea is that if you’re going to get advice, you’re going to pay for it because these things don’t come for free and the commission-based structure, you’re paying for it through the product which actually is a bit of a conflict of interest, if you think about it, because if there are different commission structures within the product, then what’s to stop the salesman from pushing you from one product to another. And some of these fees, like in annuities, it’s all kind of hidden.  You don’t really know what you’re paying.  At least, if you go to a financial planner and if you get some advice and you pay by the hour, they tell you what they’re going to charge you, you get to decide whether that’s value for dollar received and you get to vote with your feet in the light of day, so yes, I’m absolutely in favor of that.

Doug Harbrecht: Yeah, right.

Steve Pomeranz: My guest is Doug Harbrecht.  He’s the Media Director at kiplinger.com.  Hey, so, Doug, I’m a 401k investor and I’m getting advice.  What kind of changes can I expect to see if these new laws do take effect?

Doug Harbrecht: Your 401k, many employers now are moving to 401k providers or administrators that will provide sometimes free advice.  It’s something to ask your employer about.  If the administrator of your account—Vanguard does this now, for example, Vanguard is moving into the administrative business.  Once a year, they’ll provide you with a financial advisor to discuss your investments and whether you’re on track for your retirement.

Steve Pomeranz: How does Vanguard get compensated?

Doug Harbrecht: It’s part of the package that they sell to the employer.  It’s part of the administrative fee in the package to employer if you have a 401k, something to ask about.  It’s a growing trend.  Really, Steve, even if the DOL rule does not get enacted, I think it will.  I think it will go into effect and I think there will be further efforts by future administrations to try to extend this protection of a fiduciary responsibility across the board, not just to invest in retirement products, but to across the board.  Really when you get to the bottom of it, really most people don’t need this rule.  What they need to do is they need to ask the right question of their advisor now.  You can impose this rule on your advisor by picking up the phone right now and saying, “Are you a fiduciary?”

Steve Pomeranz: Simple question.

Doug Harbrecht: If they say no, well, look for another advisor or, “Can you act as a fiduciary for me and how will you do that?”  It’s a matter of transparency on the part of the person that you’re dealing with.  These are personal relationships that people have with their financial advisors, that personal sense of trust, of respect, is very, very important.  If you don’t know this, you haven’t established that relationship yet with your advisor and you need to do that right now.

Steve Pomeranz: If my broker or advisor in my 401k is charging commissions, is it possible I’ll see a change in the mix of investments as the advisor starts to move more towards a fiduciary role?  For example, because commissions are higher in stock funds than they are in bond funds, Mercer Bullard, the founder of Fund Democracy and Investor Advocacy Group, basically said that there’ll be a shift more to bond funds as the portfolio starts to more truly reflect an investor’s risk tolerance.  Do you think that’s true?

Doug Harbrecht: Yeah, it probably is true.  At Kiplinger, we advise folks that it’s really hard over the long term, which is what retirement savings is all about, is investing for the long term and being a buy and hold investor.  It’s really, really unusual for anybody to beat index funds with a long-term investment strategy.  Those funds consistently return 8 to 10% returns in stocks and it’s really hard to find a manager or a fee fund, an actively managed fund that will beat that.  The beauty of an index fund and also to some extent with bond funds is that they do have lower fees and lower costs to administer than to equity funds.

Steve Pomeranz: Yeah, so if the advisor gets out of the commission business, you can automatically see that if he’s agnostic with regards to his compensation on a product, he’s going to have the tendency to put you in a more balanced program and, you know, you mentioned 8% on stocks, but let me just give a caveat.  That ain’t every year, guys.  Some years it’s up 16%, some years it’s down 7 or 8%.  It’s a lot of volatility to maybe get that average.  We really, really don’t know.  One last question, do you think these rules are going to bleed over into other accounts.  It this like a major trend sweeping the investment advisory industry?

Doug Harbrecht: There would probably be some compromises.  As I’ve said before, there’s going to be a big fight over this rule and it’s not over yet, although I think the impetus is, at least, to extend it to retirement savings.  I think over the long term there will be continued efforts to try to extend this kind of a standard into other parts of the industry.  Other parts of the industry are going to resist it mightily, but I think at this point there’s no turning back and it’s extremely important for people to understand these things that they are going to be dealing with a financial advisor.  You don’t need the government to do this for you.  You can do this for yourself.

Steve Pomeranz: That’s exactly.  Act like an adult.  Do your homework and understand these very simple terms, fiduciary versus the suitability standard.  Ask the right questions.  My guest, Doug Harbrecht, Media Director at kiplinger.com and to find out more about Doug, to hear this interview again, don’t forget to join the conversation at onthemoneyradio.org.  Thanks, Doug.