Why the fiduciary rule alone is not enough to protect investors

Despite fierce lobbying efforts by some financial services industry players, the Department of Labor’s fiduciary rule finally goes into effect today — at least partially. Like many things in Washington, the fiduciary rule is a complicated name for a very simple concept: your financial advisor should be required to act in your best interest, not their own, when advising on retirement investment accounts.

That means you shouldn’t be charged hidden fees, and your advisor shouldn’t legally be able to sell you an investment product that isn’t right for your financial situation, just so that they can put more money into their own pockets. You wouldn’t want a medical doctor to give you pills you don’t need (and that could harm you), and you shouldn’t allow a financial advisor to do the same.

The reason some financial institutions are fighting the rule is obvious. They’re afraid it will hurt their bottom lines. What they’re not realizing is that their bottom lines face an even bigger threat — a lack of trust among their clients. For example, a recent Gallup poll found that Americans’ confidence in banks has dropped dramatically over the past decade, from 49 percent expressing confidence in 2006 to 27 percent in 2016. 

{mosads}And things aren’t getting better. In just the past few months, Wells Fargo admitted to opening millions of fraudulent accounts on behalf of their customers, Johnny Depp reportedly lost millions by trusting a financial advisor who was not a fiduciary, and Citigroup was fined $18 million for overbilling thousands of its investment clients.

Considering even just those few examples, it’s no surprise that a recent survey by Personal Capital and Nielsen of U.S. consumers shows that people are extremely suspicious of financial advisors. In fact, 70 percent of those surveyed say recent events in the financial industry have made them question the trustworthiness of financial professionals. Nearly one in three believe a financial advisor is likely to take advantage of them.

Perhaps most concerning is that people have a serious lack of knowledge about how advisors work and what they charge. Nearly half of Americans surveyed mistakenly believe that all financial advisors are required by law to always act in their clients’ best interest. Nearly a third of Americans aren’t sure. The same lack of awareness applies to fees. Twenty-one percent of investors know they pay fees on their investment accounts but are not sure how much, while 10 percent don’t even know if they pay anything at all.

The fiduciary rule is a major step in the right direction when it comes to protecting investors, but the rule won’t solve these problems on its own. For starters, the rule comes with plenty of loopholes, as it only applies to retirement accounts, not all investment accounts. It also won’t be fully implemented until Jan. 1, 2018, which means you can expect hordes of lobbyists to spend the rest of the year trying to weaken it.

So what can an investor do to protect their savings while the fate of the rule’s implementation remains up in the air? We believe that the process starts by making sure your advisor is acting in your best interest. You just need to ask one simple question: are you a fiduciary?

Only financial advisors who are fiduciaries are required by law to act in the best interests of their clients, both on retirement accounts and other investment accounts. If your advisor doesn’t answer “yes,” to this question, that means he or she can steer you into products that put more money into their pockets, as long as they are considered “suitable” for you, a much weaker standard than the “fiduciary” standard.

Your advisor may or may not be steering you into these products with malicious intent, but you should be aware that their company’s compensation structure could make it difficult for them to act without conflicts of interest. Which will win? Your interest or their employer’s interest in growing the bottom line?

It’s important to know that only an estimated 11 percent of financial advisors are fiduciary only independent registered investment advisers (RIAs), meaning they must work in your best interest at all times. In addition, up to 60 percent of those RIAs haven’t made adequate investments in technology, such as basic as financial planning software. So when you’re looking for a financial advisor, seek out a fiduciary-only independent RIA who has cutting edge financial planning software, and one that can provide a transparent view of your entire financial life.

You’ll also want to find out how your advisor or broker is compensated, and in many cases it’s not easy. Rather than being compensated in a conflict-free manner, brokers can be inappropriately incentivized by payments from mutual fund manufacturers on the share class of mutual funds sold to their client, the amount of cash held in the client’s portfolio which the firm uses to boost its own income, and the frequency at which trading transactions (whose costs are borne by the client) are made. These costs, commonly buried in prospectuses and fine print, can erode portfolio values. A single percentage point in extra fees can add up to hundreds of thousands of dollars over the course of a lifetime.

If it is implemented as intended, the fiduciary rule should lead to welcome changes and more money in investors’ pockets. Now it’s up to us to do the rest. The financial services industry must provide investors with more transparency, along with easy-to-use apps and other tools that empower them to better understand and control their financial lives.

Most importantly, investors should never be afraid to ask questions, and move on if they don’t like the answers.

Jay Shah is chief executive officer of Personal Capital, an online investing platform and registered investment advisor.

Luis A. Aguilar served as a member of the U.S. Securities and Exchange Commission under President George W. Bush and President Obama. He is now a member of Personal Capital’s board of advisors.

The views expressed by contributors are their own and are not the views of The Hill.