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Planning & Economy

Week of July 10th, 2017: If you have an IRA you will be affected…

July 10th, 2017

By the Department of Labor Fiduciary Rule (DOL). And, is not only IRAs that get affected but also all Roth IRAs, Health Savings Accounts (HSA), Coverdell Education Savings Accounts, and all ERISA (401(k) plans* Participants and Beneficiaries.

 Why the rule and what is different?

Regulators determined that participants in retirement vehicles were being recommended high-commission products by brokers, insurance agents and financial advisors as a means to maximize their revenue and not necessarily doing the right thing for the client. Most often, folks retiring and changing jobs were being asked to roll-over their 401(k) to an IRA without the benefit of understanding the benefits or downsides of such a change; often, resulting in high commission costs for the retirees. Under the current Exchange Act, governing securities, recommended securities are only required to be suitable.

The new rule expands the current definition of Fiduciary** which reads: “Fiduciary.” One who acts in utmost good faith, in a manner he or she reasonably believes to be in the best interest of the client. Under securities laws fiduciaries must eliminate or disclose conflicts of interest as well. In our new world, disclosure of a conflict is not enough; a fiduciary is prohibited from making the recommendation.

The new definition of Fiduciary as it applies to retirement accounts and plans expands the investment advice fiduciary definition by applying it to any professional making a recommendation and not simply providing ongoing advice. Previously only advisors charging a fee for service, like our practice, were considered fiduciaries.

The standards*** specifically require advisers and financial institutions to:

So, what does it mean to you, the client?

If your IRA is managed under a flat fee advisory agreement and you have a financial plan you probably will not be affected very much. You will, most likely receive information on the rule from the firm your advisor is affiliated with: most of it is to inform you of what is taking place.

If you IRA is not being managed under a flat fee advisory arrangement you will most likely be asked by your advisor to consider this approach, it most likely will increase your cost. Your advisor will also be required to spend time with you documenting your goals, objectives, financial circumstances, you needs and realigning your investments accordingly.

If you are contemplating a roll-over from a 401(k) the process becomes a little more involved: Your advisor will most likely be required to spend time educating you on the benefits and pitfalls of converting your 401(k) to an IRA.

At our office, with respect to retirement accounts, advisors are currently being held to an Impartial Conduct Standard this fiduciary standard applies regardless of whether a flat fee advisory relationship exists.

As CERTIFIED FINANCIAL PLANNER™ professionals we’ve been held to the fiduciary standard for a long time. Most of our accounts are flat fee advisory relationships also invoking a fiduciary relationship with our clients. We believe the new rules will benefit most investors not currently being served by fiduciaries.

Our portfolios and strategies reflect overweighted positions in US Equities.

Carlos Dominguez, CFP® – Portfolio Manager



*ERISA (Employee Retirement Income Security Act) covers all retirement plans: defined benefit and defined contribution plans: SEP IRAs, 401(k), 403(b), Money Purchase, ESOPs, are but some of the examples. The entire listing can be found at https://www.dol.gov/general/topic/retirement/typesofplans

** This is the definition which applies to CERTIFIED FINANCIAL PLANNERS ™ https://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/standards-of-professional-conduct/terminology

*** U.S. Department of Labor – https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-transition-period.pdf



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