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A new rule for many financial advisers: The customer comes first

How Dodd-Frank changed Wall Street

Financial advisers who provide individuals with investment advice for their IRAs, 401(k)s and other retirement accounts have new rules to follow starting Friday that are meant to protect investors from advisers' conflicts of interests. 

The Department of Labor's new regulation, known as the Fiduciary Rule, requires brokers, investment advisers and other financial professionals to base their recommendations on actions like rolling over your 401(k) to an IRA on what makes financial sense for you -- and not and just because your adviser wants a commission to increase his or her income.

Considering the growing population of older workers with large balances in employer-sponsored retirement plans getting closer to retirement, the DOL saw a need to protect workers when they retire and take their assets from the plan. The DOL is the main regulator of employer-sponsored retirement plans, and all service providers to such plans are now required to act as fiduciaries.  

Are investment pros required to act in your best interest?

Beginning June 9, financial firms and their advisers providing investment advice on IRAs and other retirement plans must meet fiduciary-conduct standards that include:

  • Give advice that is in the "best interest" of the retirement investor. The advice must meet a professional standard of care as specified in the new law.
  • The advice must be based on the interests of the customer, rather than the competing financial interest of the adviser or firm.
  • Advisers must charge no more than reasonable compensation and make no misleading statements about investments, compensation and conflicts of interest.

To be clear, most financial advisers who plan to be in business for a long time care about their reputation and have always acted in the best interests of their clients. And while an adviser's recommendation to roll over your 401(k) to an IRA may be the better thing to do, before you act on it, your adviser should review the benefits and costs of your employer's plan with you. 

Large employer plans have powerful bargaining leverage over investment managers and service providers, and they use their size to negotiate institutional pricing for investment management at the lowest available costs. 

For example, it's not uncommon for a large plan to offer an S&P 500 index fund with total annual investment expenses of less than 0.05 percent, compared to the average expenses of a similar retail index mutual fund that can carry fees of over seven to 10 times more.

There are good reasons to transfer retirement assets to an IRA. Some of these include more investment choices, more flexible withdrawal features and access to ongoing investment management and advice. To make the best decision, it's critical to objectively compare the advantages and costs of an IRA to the advantages and costs of leaving your retirement assets in your former employer's 401(k) plan. 

The DOLs fiduciary rule will now require all advisers to do that when they give you this advice.