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If it weren't already hard enough to understand whose side your financial advisor is on, it got more complicated on June 9, 2017. As of that date, all financial advisors who sell products are required to forego any sales agenda and give advice that would benefit their clients or customers (called "fiduciary advice").
Does this sound too good to be true? It is.
This rule only pertains to rollovers into an IRA from a qualified plan like a 401(k), and only to the investment recommendations for that IRA account. Any other account is still fair game for stuffing full of high-commission and high-fee products that mainly benefit salespeople and their companies. Also, in case you think your IRA is now protected from high-cost products, there's one more catch. Salespeople are not required to look out for your best interests if they explain to you how and why they intend to give advice that instead primarily benefits themselves and their brokerage company.
While this new law will probably confuse consumers more than it helps, it may be a first step toward something larger.
Here is the sad truth. Most Americans believe they already receive objective, fiduciary advice. The overwhelming odds are that they don't.
You face odds of ten to one that your advisor is a salesperson who is not required to put your financial interests first. Most Americans purchase their investments from the half a million brokers who earn commissions if they can convince you to buy an expensive alternative to the thriftier, better-performing investment options on the market. That’s more than ten times the number of advisors who adhere to a fiduciary standard. Government research estimates that consumers lost $17 billion a year to conflicted advice in the recommendations related to retirement plans made by brokers and sales agents posing as advisors.
The bottom line is that at best, only one out of every ten financial advisors puts your interests first.
The actual number of real fiduciary advisors may actually be even lower than this discouraging figure. A mystery shopper study in the Boston area found that only 2.4% of the "advisors" it surveyed (most were almost certainly brokers) made what most would consider to be fiduciary recommendations. On the other side, 85% advocated switching out of a thrifty portfolio with excellent funds into something a bit more self-serving.
The brokerage industry—that is, the larger Wall Street firms, independent broker-dealer organizations and life insurance organizations—repeatedly fought the fiduciary rule in court, arguing, in some cases, that their brokers and insurance agents shouldn’t be held to this standard. The courts refused to block the rule.
It gets worse. Brokers are held to a sales standard, but it's a very low one that is appropriately known as "compliance." They are required to "know their customer" and to make investment recommendations that would be "suitable" to someone in that customer's circumstances. In addition, a new study found that 8% of all brokers have a record of serious misconduct, and nearly half of those were kept on at their firms even after getting caught.
There is one simple way to determine whether you’re working with somebody you can trust. Ask your advisor directly to provide a written and signed one-page statement that he or she will act in your best interests. If the broker hems and haws, hold onto your wallet or purse. Chances are any recommendations you receive will cost you money, a cost only disclosed somewhere deep in the fine print of whatever agreement you sign. If the advisor signs the statement, chances are you will receive fiduciary advice.