Federal regulators are cracking down on advisers who profit from providing venal advice to retirement savers with new rules that demand that the industry adhere to a so-called fiduciary standard. Officials estimate that imposing this standard, which requires advisers to act in the client's best interest, will ultimately save American consumers $17 billion annually lost to conflicts of interest -- in other words, where the adviser pockets the profit instead of you.
While consumer advocates lauded the soon-to-be-enacted rules on Wednesday, some acknowledged that the battle may not be over. Financial services companies, complaining that the rules are overly burdensome, have threatened to sue. In the past, they've also persuaded members of Congress to throw language into pending legislation to derail the rules.
"The industry complaining about unnecessary and burdensome regulations is like an NBA player complaining about getting called for a foul," says Scott Puritz, managing director of Rebalance IRA. "Sports fans want officiating to be fair and even-handed; retirement savers need the entire personal finance industry to be guided by a level playing field of rules and pro-consumer protections."
Largely technical in nature, the new fiduciary standard rules are designed to reduce invisible conflicts of interest that arise because of the way some advisers are compensated. Simply put, high commissions paid on some financial products encourage advisers to sell -- and sometimes churn -- these products. These rules will require all advisers to adhere to a higher standard when selling products and to warn customers with a disclosure statement what their conflicts of interest may be.
That said, the rules will not be fully enacted until 2018 -- assuming that they survive any potential challenges in the court system.
"These are a step in the right direction, but consumer self-defense is very important," says Liz Davidson, author of "What Your Financial Advisor Isn't Telling You."
What should you do to protect yourself from retirement rip-offs?
Don't buy from the bank:
In explaining the need for the rules, Secretary of Labor Thomas Perez cited a couple who had been talked into pulling $600,000 out of Vanguard mutual funds to invest in annuities sold through their bank. The annuities charged exorbitant fees and performed far less well than the mutual funds that they abandoned. This rotten advice would arguably prove illegal under current law, which bans advisers from peddling investments that are "unsuitable" for their clients. It would be even more illegal under a fiduciary standard. Still, as a practical matter, bankers are notorious for selling high-cost investments of dubious value. Your bank is a good place to open a checking account -- and, maybe even to get a credit card. It's a rotten place to buy investments.
Beware advisers buying meals. In recent months, postcards inviting consumers to learn about retirement investments at hosted meals have become so common that financial advisers at the Tarbox Group in Newport Beach decided they had to be proactive. They asked clients who got the postcards to bring them in so they could look up the background of the advisers hosting the seminars together. The result? "About half of them have bankruptcies or disclosure events," says Mark Wilson, chief investment officer at the Tarbox Group.
If your adviser can't keep his own finances in order well enough to stay out of bankruptcy, it's a clear warning sign. So too are "disclosure events" -- financial speak for when an adviser is sued by a client or is sanctioned for bad behavior by regulators. The meal itself should make you suspicious, Wilson adds. The idea is to work on psychological cues that make us feel like we need to reciprocate when someone gives us something. At the very least, look up an advisers background here before you attend a seminar.
Stick to what you understand. Good investments are straightforward. Buy stocks and you're buying a piece of a public company, expecting to share in its future profits. Buy bonds and you have an I.O.U. from a company, government or agency. Buy a certificate of deposit and you have a government-guaranteed savings account. Buy a Real Estate Investment Trust and you have a piece of a commercial real estate enterprise that will pass a portion of its profits on to you each year. Mutual funds are simply investment pools that own investments like these and it should be easy to see what's inside the pool. Simple, right? If someone is trying to sell you an investment that can't be easily explained like these, watch out.
"You should never buy an investment that you can't explain to a friend or family member," says Davidson. "You need to know what it is; what you paid for it; and understand how it fits into your personal financial strategy."
Read.The new fiduciary rules will require anyone who sells retirement products to spell out any potential conflicts of interest. But like the disclosure statements you get with your checking account, it would not be surprising if the important details are buried deep in the fine print. This is your money. Read it. And don't let anyone rush you through the process, saying it's "just legalese." If they give you a disclosure statement, you need to know what it says.
Likewise, if someone tries to sell you an annuity or "a private offering," ask for the paperwork. It will be long. It will be boring. And it will spell out just how much your funds can be put at risk. Unless you have money to lose, you need to battle your way through the fine print to make informed investment decisions.
Ask. The new rules won't go into full effect until 2018. In the meantime, if you don't understand an investment or know how your financial adviser is compensated, ask. A good financial adviser will take whatever time is necessary to educate you about the right investments for you and what makes them appropriate. Good advisers will also not hesitate to explain how they are paid.
"We talk to people all the time who don't know what they are paying for investment advice and they think it's impolite to ask," says Davidson. "Really? Would you go to the store and not ask what the products cost? You should be comfortable discussing these things with your advisers. You have to. It's your money and nobody cares about it more than you."