034 – What is the new fiduciary rule everyone is talking about?
Once upon a time seeking out life planning, financial planning, and retirement planning was not necessary. Our parents or grandparents worked one job until the age of sixty-five and then collected a pension and social security. If we had a little extra money we bought financial products; stocks from a broker, whole-life insurance from an insurance agent, or CD’s from a banker. Life expectancies were a lot lower so, after a few years, we died. The financial representatives job was to sell products strictly and earn the commission from selling the product.
Fast forward to now. Life, financial and retirement planning take on a whole new meaning. We work several jobs throughout our career and have 401(k)s and IRA’s scattered all around. Long gone are the comfortable pensions that our parents and grandparents were awarded. Now the investment responsibility rests solely on our shoulders. On the positive side of the “new retirement, ” there are so many more opportunities. We are living much longer, and we may spend a third of our life in retirement. On the flip side, there are so many more financial responsibilities we must navigate. There are so many more questions that need to be answered. At what age can I retire comfortably? What is the best way to invest my money, so it does not run out in retirement? What kind of insurance do I need? How much will health care cost in retirement? These are just a few of the many questions we face.
One day, knowing that people longed for help with their financial decisions, a new kind of career popped up, a financial advisor. This is the type of advisor that takes a holistic approach and advises on every aspect of your financial life.
The government was okay with this sort of consultant. However, they held these advisors to the fiduciary standard – which just means that any advice given needs to be in the best interest of the client. Remember those Brokers and insurance agents selling the financial products, and still are. Well, they are not held to the fiduciary standard; they are held to the suitability standard. A suitability standard simply states that the product they are selling (usually for commissions) just needs to fit with the client’s objectives, but does not have to be the best available option.
Brokers and Insurance reps were making a nice living off of the high commissions earned by selling products but were starting to get a bad rap. So they had a magnificent idea; they switched their business cards to read financial advisor, instead of the old titles of stock broker and insurance representative. This worked out well for the stock brokers and insurance representatives. However, it made the lines blurry to the consumer trying to get financial advice. Consumers think they were going to see a financial advisor acting in their best interest but instead they went to a broker or insurance representative.
The Department of Labor oversees Individual Retirement accounts, or IRA’s. They spent the last couple of years trying to get a bill passed that would make stock brokers and insurance reps fall under the fiduciary standard when giving advice about investment accounts. The DOL succeeded with the new bill that was recently passed. There is a problem. The Department of Labor does not have control over regular investment accounts. Millions of Americans have money earmarked for retirement inside of investment accounts, and outside of IRA’s. The new rule will only make the brokers and insurance reps act in your best interest when advising on your 401(k) and IRA, not any other investments. Once again, this still makes things very blurry for the consumer looking for a financial advisor to act in your best interest ALL OF THE TIME.
The broader definition of fiduciary will take effect in April 2017, according to the DOL. Until then, if you are not sure which standard your financial professional follows – make sure you ASK!
About the author, Scott Wellens
Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.
Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.