Last week, an important new rule was implemented by the Department of Labor.
If you work with a stockbroker or financial advisor, it’s sure to affect you.[ad#Google Adsense 336×280-IA]The crazy thing is… prior to the creation of this rule, your broker was not legally required to act in your best interest.
Of course, many did anyway. The industry has countless professionals who work hard at providing the best advice for a reasonable cost.
But not all.
Brokers have historically been allowed to sell expensive funds or products with hefty commissions, regardless of whether it made sense for their clients.
To be clear, registered investment advisors are a bit different. They are often independent advisors and have always been required to act as a fiduciary (in the client’s best interest).
I’m strictly talking about stockbrokers here.
Another surprising fact? There are very few qualifications to become one. You have to pass several licensing exams, which are not particularly hard. And that’s pretty much it.
I have a friend who is a very successful broker. Before giving financial advice, he gave skiing lessons.
He had virtually no experience in the financial world, including with his own money.
In his view, he sells widgets. It doesn’t matter if he’s pushing funds, stocks or any other instrument. My friend is not a bad guy, either. He genuinely tries to do the best for his clients. But he has no interest in the markets.
He doesn’t read business newspapers or look at financial websites. And whenever I try to talk to him about the market, he cuts me off quickly. The products he sells are just widgets. That’s all.
But getting back to the point…
What do these new rules mean for investors?
Once the law is fully implemented in 2018, your broker shouldn’t be able to peddle high-cost products unless he or she can prove they are the best available option for your situation.
For example, say there are two growth funds that could potentially meet your needs. One is a no-load fund with an expense ratio of 0.75%. The other has a 5.75% load with a 1.5% expense ratio. Your broker better have a damn good reason for recommending the more expensive fund. Otherwise, he or she is now in violation of the new law.
That said, there is still a lot of leeway.
Thanks to lobbying by insurance companies and financial institutions, the rule does allow variable annuities and futures trading in retirement accounts.
Variable annuities are usually horrible investments that cost investors thousands in fees. And while they do limit downside, they also limit upside. I’m not a fan of fixed annuities either, but at least you know what you’re going to get. Variable annuities have high expenses and cap how much you can make. (Where do I sign up?!)
Futures and other speculative trading should be done in a retirement account only if you are so wealthy that you can afford to lose it all.
That’s not to say you should never trade futures or other speculative investments. But there is higher-than-average risk here and, usually, you don’t want your retirement money tied up in risky assets.
The new law is a step in the right direction, but you still need to be vigilant.
When you meet with your advisor, ask questions. If they recommend an investment, be sure you understand the costs, fees and expenses involved. And always inquire about a cheaper alternative.
After all, if you can save half a percentage point on a $100,000 investment, that’s an extra $500 in your pocket.
As The Oxford Club’s Chief Investment Strategist Alexander Green often says, “No one cares more about your money than you.”
The new law doesn’t change that.
Source: Investment U