It's hard to say what will happen once the dust settles on the fiduciary rule, an expansion of the Employment Retirement Income Security Act of 1974 that turns all financial professionals selling retirement products or offering retirement advice into fiduciaries.
Although two key provisions have already gone into effect as of June 9 – who is a fiduciary and what ethical standards they are to uphold – there is still much confusion circulating among investors as to what this change means to them and what's to come.
Where we are so far
Throughout the first half of 2017, the Department of Labor has delayed the official compliance deadline multiple times, with the first and most notable postponement coming at the behest of the newly inaugurated President Donald Trump until the agency could review the reform's broader implications.
Recently, the DOL filed an extension with the Office of Management and Budget, tentatively pushing full fiduciary rule compliance until July 1, 2019 and giving wealth managers almost two years to prepare administratively for enforcement, according to Reuters.
In light of these developments, how should investors act if they don't want their assets mired in uncertainty and wish to continue building their wealth despite hang-ups on Capitol Hill?
Ask your financial adviser to prove its fiduciary standards
A mutually beneficial wealth management partnership is built on trust and communication. Regardless of the state of the fiduciary rule, your retirement adviser must act in your best interests. But, to put it bluntly, you must act as the enforcer until the federal government catches up.
Earlier this year, Blaine F. Aikin, executive chairman of Fi360 Inc., a consultancy specializing in adopting fiduciary standards, advised financial services firms affected by the fiduciary rule to begin building evidence of their impartial conduct, such as creating standards and drafting written policies on the matter. Although no wealth adviser is obligated to produce these things yet, investors ought to ask for them anyway to see if their brokers are currently equipped to be a fiduciary in every sense of the word.
Beware of movement from commission advising to fee advising
Partial implementation of the fiduciary rule has many wealth managers moving clients from commission-based brokerage to fee-based products. As The Wall Street Journal reported, fee-based assets increased in number by 19 percent and 17 percent at Merrill Lynch and Morgan Stanley, respectively.
This transition is hardly a defensive posture. Many financial experts agree that fee-based brokerage has the potential to drive incredible revenue growth for wealth advisers and with greater reliability than commission-based assets. Investors would be wise to keep this in mind and weigh the impact of such a transition on their long-term wealth management strategies.
Those who would like to play things safe, for example, may welcome an opportunity to switch from mutual funds – these days, a potential liability for brokers – to passively managed index funds, even if it means fees instead of commission. However, any movement in that direction should include a detailed discussion of where, when and why fees are incurred.
For more information on the fiduciary rule, contact your financial advisers or a wealth management specialist today.