Fiduciary Duties & The New Rule for Financial Advisors

The New Rule

When consulting a financial advisor, we all assume that they would have our best interest in mind when determining where our portfolio should be invested and what investments best suit our interests, however, this has not always been the case. This year, the Labor Department issued new regulations that require industry professionals dealing with individual retirement accounts and 401k accounts to act on the best behalf of their clients.

Before this new standard was issued, financial advisors only needed to meet a suitability standard, meaning that the financial advisor only has to choose what is suitable for the portfolio, which is not always what is in the client’s best interest. A financial advisor under this standard could invest in a fund he found suitable, but may be more risky or expensive, although a similar option is available with a different fund. This suitability standard led to many advisors investing in funds they were personally interested in, sparking a need for change.

How This Impacts the Aging Population

This is particularly important for our aging population as they continue to invest and rely more on their 401k savings and investment retirement accounts. Many aging people are planning to rely on those income generating investments in order to make more of what they have set aside for retirement, while still maintaining a similar lifestyle to what they currently know.

This new rule seeks to address those concerns raised in light of the improper investing techniques seen in some portfolios where higher costs than necessary were paid for an easily achievable and similar result, and when the market took a downturn, those whose money was invested were left without thousands of dollars they depended on.

In order to ensure their accounts are properly managed, those aging individuals should consult their financial advisor about the new standard and continue to monitor their performance reports. It also should be noted, this applies to those tax-advantaged accounts such as 401k accounts, traditional and Roth individual retirement accounts.

If you find that an adviser or a firm is not following the new best interests standard, investors are able to seek recourse through a breach of contract claim or under ERISA, and then can pull their accounts as a result. While new fees may be applied to these tax-advantaged accounts, the change will overall result in a more honest and reliable relationship between investors and advisers.

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