Business Ethics Word Cloud On A Vintage Blackboard

As an Elder Law and Estate Planning attorney, it is essential for the work that I do for clients to take a careful inventory of their assets.  Since I’m a lawyer and not a financial advisor, it’s not my place to advise them on how to invest their money.  However, I can’t help noticing that many of them are earning practically nothing on their investments.  Sometimes, I will comment:  “Did you notice that you are earning only 0.2% interest in your ‘high interest’ savings account?”  Or, “Are you aware that, if you withdraw funds from your fixed annuity, you will be forced to forfeit the interest on your investment and will be required to pay a surrender charge?”  Often, the answer is, “Really? No, I didn’t realize that.”

I have actually seen clients’ account statements showing that they were earning as little as 0.02% interest (that’s two-hundredths of one percent interest).  Surprisingly, some of this money is even being held in retirement accounts, such as an IRA or a 401k.  As you probably know, money in retirement accounts is allowed to grow on a tax-deferred basis, meaning that income and gains are not subject to any current taxation.  Your money is subject to income tax only when it is withdrawn, presumably when you are a senior and probably no longer working for a living.  When wisely invested, money in retirement accounts can grow dramatically due in large part to the compounding effect of the tax deferral.

Which brings us to the topic that is on my mind today – the “fiduciary rule.”  It’s a complicated topic that defies a short and easy explanation, but it’s important to understand what the issues are.  I’ll do my best here, but readers who want a more complete explanation can and should do a little research on the Internet.  With that disclaimer, here we go:

Traditionally, financial planners, brokers, and insurance agents who work with retirement plans and retirement accounts, have been required to offer investments that meet the “suitability” standard.  “Suitability” means that the investment satisfies the client’s investment needs and objectives.  However, the “suitability” standard does not require financial planners, brokers, and insurance agents, to act in their clients’ best interest.  In other words, they can recommend and sell you investments that are “suitable,” and earn a larger fee or commission than they would have earned had they sold you an investment that was better for you.

Enter the fiduciary rule, which was proposed by the Department of Labor several years ago.  The fiduciary rule would have required that, when advising clients on their retirement accounts, financial planners and brokers act in the clients’ best interest.  They would have been required to put their clients’ interest first and ahead of their own.

Not surprisingly, the fiduciary rule was challenged by the financial services and insurance industries, and implementation was delayed.  Recently, the U.S. Court of Appeals for the 5th Circuit voided the rule, and the Department of Labor is no longer willing to fight for it.  As a result, investors may not be getting the best advice from their financial advisors, who may be affected by undisclosed conflicts of interest.  This makes choosing a financial advisor who you can trust even more important.

Also important is learning about the costs and fees associated with the investments you make.  You can ask your broker how much money he or she makes on each investment recommended to you.  You may feel uncomfortable, but would you even buy a pair of shoes without knowing the price?  Your investments are no different.

Financial advisors who charge a fixed fee (e.g., 1% of assets under management) rather than a commission on each purchase or sale of a security arguably have goals that align with your best interests.  However, even they may have incentives to offer certain investment products, such as funds that are proprietary to their firm.  We suggest that clients ask their financial advisor to put in writing whether they are acting as a fiduciary in providing investment advice.

When clients ask us to recommend a financial advisor, we are happy to refer them to reputable advisors who we believe will act in our clients’ best interest.  We believe that even extremely cautious and risk-averse clients should be able to get a fair return on their investments.