You don’t have to take the advice of your financial adviser.
I need to say this because some investment professionals are telling clients that the federal government is forcing them to invest a certain way — all to comply with the Labor Department’s new fiduciary rule.
Under guidelines that went into effect on June 9, investment professionals, when giving advice about retirement plans, such as a 401(k), are required to put clients’ interests first.
Financial-planning professionals who are not “fiduciaries” — say, certain brokers or insurance agents — aren’t held to that standard. They just need to make sure that their advice is “suitable” for clients. For example, the person advising you to buy a mutual fund might not reveal that he is getting a huge commission to sell you the fund or that there is a similar lower-priced product available.
If you give retirement investment advice, you are a fiduciary and have an obligation to give advice that is in the best interest of your client.
Consumer advocates championed the rule’s implementation. For obvious reasons, many investment companies and professionals did not. Some issued warnings that, to meet the new standards, they might have to overhaul a client’s portfolio, potentially increasing costs.
A Massachusetts couple contacted me with concerns about the recommendations their adviser is giving them. The husband wrote:
“My wife and I have retirement savings in different plans that offer different investments. We have a financial adviser who considers all of our holdings jointly, and makes recommendations based on the combined portfolio, taking advantage of the best choices among the different plans. We just met with the adviser, and we were told that this arrangement is no longer feasible. Although our combined portfolio may stand up to the fiduciary rule, independently they may not. As a simple example, imagine that all my holdings are in equities, and all my wife’s holdings are in bonds. In isolation, it would be hard to claim that the allocations and selections are in either of our [separate] best interests. He proposed a new portfolio for each of us that reflects a more justifiable allocation for each independently, but is worse (in my opinion) in terms of expected performance. Is this a feature of the new fiduciary rule, protecting us from ourselves?”
It’s not unreasonable that the adviser is re-evaluating this couple’s portfolio. But indicating that his advice is something the couple must do for him to comply with the law seemed wrong based on my reporting on the rule.
I wanted a second opinion, so I asked Barbara Roper, director of investor protection for the Consumer Federation of America.
“The rule does not in any way limit what people can choose to do with their own money,” Roper said.
The adviser’s recommendation might reflect an cautious interpretation of the rule, she added.
“Advisers are required to consider the customer’s overall financial picture in determining what is in his or her best interest. That would include looking at how the rest of the couple’s portfolio is invested,” Roper explained.
Firms not sure of what they should do need to check with the Labor Department before making recommendations, she said. As long as advisers are documenting recommendations and a client’s desire to do something contrary to their advice, they should withstand the best interest test.
Roper said it’s likely there will be more such examples, where firms or individuals give bad advice and blame it on the rule.
“Customers should also think about how this sort of nonsensical recommendation, which isn’t consistent with the rule let alone required by it, reflects on the overall quality of the advice they are getting.”
Michelle Singletary welcomes comments and column ideas. Reach her in care of The Washington Post, 1150 15th St. N.W., Washington, DC 20071; or singletarym@washpost.com.
