Update: Due to court ruling, the new fiduciary rules highlighted below were struck down in court, in early 2018, and are no longer applicable. However, the rest of the article is still worth reading, in that it provides some clarity on why you need to protect yourself from conflicts of interest from financial advisors, and why it ultimately is in your best interest to enhance your personal finance and investment knowledge so that you don’t need a financial advisor and can become your own.
There was big financial industry news last week as the U.S. Department of Labor has clarified a new fiduciary standard rule meant to protect retirement investors from conflict of interest by those giving them financial advice (through the threat of breach of contract if they do not), starting in April of 2017. If you have a lot of time on your hands, here’s the full DOL fiduciary rule.
What does this change potentially mean for you? The White House estimates that middle class investors have been losing 1% in returns on average, which equates to approximately $17 billion per year due to advisers pushing them towards lesser products that often have higher commissions, against their client’s best interests. Those losses really add up over time.
While I believe that the new fiduciary rule is a step in the right direction, I highly encourage you not to have unwavering faith that it will truly protect your investing best interests on its own.
For starters, the new fiduciary rule will only apply to self-directed retirement accounts (namely 401K’s and IRA’s). Everywhere else, advisers will still be held to the far less stringent “suitability standard” with their investment advice versus advice in their client’s best interests (as is supposed to be the case with the “fiduciary standard”). In other words – unless your adviser tries to sell you anything short of sea monkey futures contracts or Saskatchewan beaver pelt derivatives, they are probably going to be able to suitably justify it and get away with it in non-retirement accounts.
Next – just because a “fiduciary standard” will exist, doesn’t mean it will be adhered to by all professionals. Loopholes (legal or otherwise) will be found. If the financial industry has shown us anything, it’s that they are extremely clever (and dastardly so) in finding ways to extract profits from unsuspecting victims. And that doesn’t even take into account individuals trying to boost their own compensation.
And finally, why would you open yourself up to the potential for conflict of interest in the first place, fiduciary rule or not? I am not entirely opposed to the idea of seeking financial advice from others, however, relying on others to pick investments for you? It’s risky business. And in today’s information age, it’s totally unnecessary. Why?
- There’s too much evidence that points to low-cost passive index investing outperforming high-cost actively managed investments (the kind your adviser might find more “suitable” for them, er… you). The best way to invest your money is through low-cost ETF’s and index funds (hell, even Warren Buffett recommends investing in index funds, despite being one of best stock investors of all time). Sadly, 70% of investments are active versus passively managed in the U.S., despite recent passive investment gains.
- Access to discount brokers like Vanguard and Ally Invest is open to everyone online – and the trading costs are extremely cheap (and much cheaper than what an adviser will likely charge you). Many discount brokers offer commission-free ETF trades.
- By going to this thing called Google, you can learn about any type of investment on the market, in almost no time.
- If you don’t like doing the work of picking and periodically rebalancing investments, there are automation platforms like Betterment that can do it for you for a tiny fee.
There aren’t really any good reasons anymore to rely 100% on financial advisers to pick investments anymore. And, no, laziness is not a valid excuse.
At the very least, when choosing a financial planner, make sure you limit conflict of interest by doing things like asking them to put that they are acting under the fiduciary standard in writing. And the more investment knowledge you have, the better. Consider it your fiduciary standard to yourself.