Then, early in 2015, the U.S. Department of Labor (DoL) announced a plan to tighten the requirements by imposing new regulations. The DoL drafted regulations whose objectives were to:
- Strengthen the responsibility of retirement plans and retirement advisers to act in their clients' best interest, and
- Extend fiduciary requirements to IRA providers and to rollovers between IRA and 401(k) or 403(b) plans.
Note that the DoL's jurisdiction extends only to retirement accounts. It does not cover ordinary brokerage and after-tax savings accounts. That, in itself, is an important limitation. Furthermore, the final regulations, while arguably an improvement, are weaker than the original proposal on several counts. Among the many commentaries appearing in the financial media, two articles that aptly describe the limitations of the new DoL regulations are here and here. Rather than reprise the skepticism evident in those articles, my aim in this post is to suggest how you can evaluate your own adviser, taking into consideration what the new regulations do and don't require.
Ask your adviser the following questions. Or review the website of the adviser's firm to see whether the answers are available there. A genuine fiduciary (one who puts your interests first) would answer "Yes" to all, or very nearly all, of these questions. Some of them are based on ideas in the original DoL proposal that were weakened, regrettably, after some investment firms objected.
- Will you sign a written fiduciary oath, as recommended by National Association of Personal Financial Advisers and the Committee for the Fiduciary Standard? (Note: If the answer is, "I support the oath but my legal department won't let me sign it," that counts as a "No.")
- Will you charge a flat fee or hourly rate for work delivered or a fixed percentage of the assets that you manage in my accounts, and not charge a sales commission of any kind? (Note: You should pay your financial adviser as you would pay your attorney or accountant.)
- If your employer gets revenue or fees from any of the products you recommend to me, will you provide a detailed accounting of those charges, even if you personally get no commission?
- When you recommend products to me, will you provide a detailed list of all fees and charges I will pay for purchasing and owning those products, including total annual dollar amounts for current and future years?
- When you recommend products to me, will you show me multiple firms that offer such products, comparing the merits of each firm?
- When you provide financial advice about investments or savings, will you show me the potential future performance of my account, including a most-likely estimate and a worst-case estimate?
- Will your advice show how the future performance of my investments or savings might be impacted if either inflation or deflation occurs?
- If my financial goals or preferences change for any reason, will you be available to help me understand the impact of making the changes?
The point of asking these questions is that the federal regulations simply are not strong enough to guarantee that your adviser will put your interests first, even if he or she professes to be a fiduciary under current guidelines. To download a pdf copy of the questions, click below: