Image Credit: Christophe Vorlet
By Jason Zweig | Apr. 1, 2016 1:02 pm ET
It’s still your job, not the government’s, to protect your retirement savings.
Under new rules imposed this past week by the Department of Labor, anyone being paid to provide specific investment advice on retirement accounts must do the right thing for his or her clients.
While the regulations are likely to reduce costs and improve returns for many savers and retirees, they raise a new risk: That investment salespeople will use the term “fiduciary” as marketing magic.
By law, a fiduciary must be impartial, seek diligently to avoid conflicts of interest, disclose any remaining conflicts and always serve the best interests of clients.
Until now, only registered investment advisers — not most stockbrokers and insurance agents — have had to be fiduciaries. From now on, all of them will be when they get paid for specific investment advice on retirement accounts.
Is there any better sales pitch than “I have to do what’s right for you”?
But the new rules don’t oblige stockbrokers and insurance agents to act in your best interest on your other investments. Nor do the regulations prevent these salespeople from calling themselves “financial advisers” when they aren’t registered as investment advisers.
Confused? You aren’t alone. In an online survey of nearly 500 investors last month, 51% said — incorrectly — that brokers must always act as fiduciaries. Only 44% correctly said that about investment advisers.
Now that just about everyone getting paid to handle a retirement account must act as a fiduciary, it’s up to investors to ensure that he or she behaves like one.
Poke around on adviserinfo.sec.gov, and you will quickly find dozens of firms that charge advisory fees of at least 2% annually.
When you can own the entire U.S. stock market for as little as 0.03% a year, it seems bizarre that someone calling himself or herself a fiduciary would charge you at least 66 times that rate.
But it’s perfectly legal, says Tamar Frankel, a securities-law professor at Boston University. Acting in their clients’ best interests doesn’t require fiduciaries to sacrifice their own. “A fiduciary doesn’t have to be Mother Teresa,” she says. Fees should be reasonable, but the law doesn’t define that precisely.
So you should. Most investment advisers say their fees are negotiable, but most clients never try. Remind your adviser that in the long run, a balanced stock and bond portfolio is unlikely to return much more than 2% annually after taxes and inflation.
Even a 1% advisory fee — the industry standard — is half of that expected return.
Another wrinkle: The Labor Department rules permit fiduciaries, once they obey certain procedures, to sell investments that don’t trade regularly in public markets, such as private real-estate investment trusts and business-development companies. While not all these assets are toxic, many are risky.
If an adviser recommends non-traded securities, that’s a red flag. Ask him or her to tell you — in writing — what these investments can do for you that publicly traded equivalents can’t. If he or she won’t, ask yourself whether you should get a different adviser.
Finally, remember that no regulation, and no adviser, can eliminate all conflicts of interest. Long ago, no less an authority than the U.S. Supreme Court held that the most insidious financial conflicts are unconscious — driven by biases that advisers themselves might deny.
Many, for instance, charge management fees even on clients’ cash balances — earning 1% for themselves on assets that take no skill to manage and, nowadays, return 0.1% or less. These advisers could generate a much higher, safer return for clients by moving the cash into bank certificates of deposit — but then they would forgo their own fees.
By the same token, many advisers help “manage” mortgage debt instead of urging clients to pay it off early. Clients often have to sell investments to extinguish a mortgage — which would reduce assets under management and, in turn, the advisers’ fee income.
So, when you talk to an adviser, cite examples like these. Ask whether he or she can think of similarly subtle, pernicious conflicts. An adviser who denies all possibility of conflict is dangerous. The one to hire is the one who thinks humbly and deeply about how your interests can diverge.
A fiduciary is, literally, someone in whom you place faith — and that kind of confidence ought to go down to the bone.
Source: The Wall Street Journal