How the Department of Labor Fiduciary Rule May Impact You and Your Relationship with Your Financial Advisor

Michael G. DiSalvo

Kevin M. Reynolds

Perhaps you’ve read about the Department of Labor’s Fiduciary Rule, which is scheduled to go into effect in April, 2017. To sum it up, the new rule places regulations on those who offer investment advice on retirement accounts, requiring them to act as fiduciaries, which means they act solely in the client’s best interest when offering financial services and advice. Furthermore, the DOL rule requires brokers to disclose practices that may present conflicts of interest, and primarily targets commissionable products. This includes disclosing their commissions and any bonuses they may receive based on selling a specific product, and clearly outlining fees to help ensure what the client is paying is reasonable. It is estimated that biased advice drains $17 billion in exorbitant fees from retirement accounts a year. It’s vital that the client knows what the broker is making off their accounts.

The rule will have repercussions among different retirement accounts and products, but it will primarily target commissionable products. The new standard doesn’t possess the power to prevent advisors from recommending products with higher commissions, but it limits them to charging reasonable fees and demonstrating that the product is in your best interest. While financial firms try to determine their responsibilities in the midst of change, we at Krilogy have always acted as fiduciaries, creating comprehensive wealth management strategies for clients and providing fiercely independent advice that isn’t influenced by commissions or bonuses.

What this Means for You

One thing you can be sure of is that the relationship and the communication you share with your advisor may need to be re-examined as the new rule takes effect. Following is a list of the top things to consider and question as you move into 2017:

  1. Fees and Commissions: Review your investment statements for the past one to two years to determine what you’re currently paying in fees and commissions. If it isn’t clear in your statements, ask your advisor to give you a detailed accounting of this information. You also may be able to do an internet search on your investment firm and the name of your investment (or the product they’ve included in your portfolio), or look at your investment firm’s annual report to determine if they’re reporting any income or bonuses tied to the products in your portfolio
  2. New Fee-Based Account Structures: Many investment firms will be moving retirement accounts into new fee-based accounts. Be sure to talk with your advisor to make sure you understand how the new fees will work, when they’ll be applied, and exactly what you’ll be receiving in return for the fees.
  3. Your Financial Plan: Has your advisor developed a comprehensive financial plan that considers your goals, risk tolerance, and unique situation to determine the appropriate mix of investments? Is that plan monitored on a regular basis (at least annually) and updated to reflect any changes? Is your portfolio rebalanced on an ongoing basis? Do you have a copy of your plan, and can you access your accounts to quickly assess status and performance?
  4. Your Advisor: Ongoing, regular communication with your advisor will be key as the fiduciary rule goes into effect. Because your advisor is now required to serve in a fiduciary capacity, that means he or she must be acting in your best interest at all times. Gone are the days of your advisor calling you to recommend (i.e. sell you) the newest hot stock or investment fund. You and your advisor should be in communication throughout the year and performing, at minimum, an annual review of your portfolio to ensure that it still meets your needs.

If you’re not sure what you’re getting from your financial plan or if you’re concerned that your advisor is really not serving as a fiduciary, it may be time for a second opinion. At Krilogy we monitor our clients’ portfolios, endeavor to anticipate changes that could lie ahead, and make the appropriate adjustments to maintain the appropriate balance for your risk tolerance. We believe it is what is appropriate to properly serve you when it comes to your financial plan.