A new move by President Donald Trump which delays and reconsiders the Department of Labor’s fiduciary rule, scheduled to go into effect in April, may mean higher costs for individual investors and retirement plans, especially 401(k)s offered by small businesses.
Fortunately, the threat of the regulation had already started to change the way financial institutions do business. Some firms have moved away from their higher-cost products and toward making their fees easier to explain to clients.
Investors should always keep a close eye on how much they’re paying, since a fee of 1 or 2 percent can have a surprisingly large cumulative impact on their financial future if it’s charged yearly.
For example, did you know that mutual fund returns in 401(k) plans are normally reported as net returns, meaning that fees for managing your investments are subtracted from your gains or added to your losses before calculating the annual return. Other costs, such as administrative and record-keeping fees, are often divided among plan participants but are not explicitly listed on individual investment statements. This lack of transparency is frustrating for investors.
Investors should also ask detailed questions about how their advisers are being paid. What incentives do they have to steer you into products they recommend? An adviser may operate differently if they’re paid by the hour or by a percentage of the assets they manage, versus if they’re paid extra commissions for certain in-house products. Even if the rule passes, I just can’t believe that institutions are going to stop pushing products down your throat.
People who don’t know the first thing about annuity expenses, load fees, or the importance of a mutual fund’s expense ratio have been held hostage by unscrupulous salesmen.
The truth is that the financial services industry has many caring people of the highest integrity who truly want to do what’s in the best interest of their clients. Unfortunately, many are operating in a “closed circuit” environment in which the tools at their disposal are “pre-engineered” to be in the best interests of the “house.” The system is design to reward them for selling, not providing “conflict-free” advice. And the product or fund they sell you doesn’t necessarily have to be the best available, or even in your best interest.
To receive “conflict-free” advice, we must align ourselves with a fiduciary. These professionals get paid for financial advice and, by law, must remove any potential conflicts of interest (or at a minimum disclose them) and put the client needs above their own.