Scott Hanson and Pat McClain explain what the recent Department of Labor ruling on fiduciary advisors means for investors.
Scott: Phyllis, you are with Hanson McClain.
Phyllis: Good evening, my question is, can you briefly explain to me about the new law that requires financial advisors to be fiduciaries, and does it affect something you've already purchased?
Scott: Oh, good question. So, a little background on this. There's many different regulatory bodies that oversee financial services. For instance, the banking industry has the Department of Treasury. They've got all kinds of different regulatory bodies. And then in the securities industry, there's the Security Exchange Commission (SEC), there's the Financial Regulatory Authority (FINRA), there's the Consumer Financial Protection Board, and so on.
So, there's all kinds of regulatory bodies, but there's still been a position for retirement assets, money that's been in a 401K or an IRA, when somebody's retired, that someone could sell financial products to someone that were not necessarily in that person's best interest. Right? So you could go to some broker at a bank or wherever and with your 401K rollover, or, if you're retired, your IRA, and they could sell you a financial product that may or may not be in your best interest.
Now, the Department of Labor had been looking at this and saying, you know, we don't really like some of the garbage products that are pushed on people once they retire. Once they retire, their 401K leaves their employer and goes to a retirement plan. So they pushed through a rule that got bantered around for a long time that basically stated that when somebody recommends an investment in money that used to be in a 401K plan, or is even still in a 401K plan, they have to legally act in that client's best interest, and not their own.
There is a legal requirement that they put their customer's interest ahead of their own.
Pat: But this law only requires that rule in an IRA. So you could have a brokerage account or you could have some money that you had in the bank that moved to a brokerage account that isn't in IRA, and those fiduciary rules do not apply. Which makes no sense whatsoever, does it? Because if it applies for some of your money, if it's good for some of your money, why isn't it good for all of your money?
Pat: So, does it apply to something you've already bought? Do you have money in IRAs?
Phyllis: I do.
Scott: Okay. It will only apply if you are being charged a management fee on that account. So if you have a broker or advisor who is charging you an ongoing management fee, which is common but you don't see it everywhere, then the rules that comes into effect next year will apply.
Pat: What is in your IRA? We could actually give you an idea whether it applies or not.
Phyllis: Mutual funds.
Scott: Okay. And do they have an A, B or C behind their names?
Phyllis: That I don't remember.
Scott: Is there somebody, do you pay a quarterly fee to somebody to manage them and move them around for you?
Phyllis: Yes I do.
Scott: Okay. So you already have, it sounds... do they work for a big bank or are they an independent advisor?
Pat: I bet they're a fiduciary.
Scott: You already have a fiduciary relationship.
Scott: You're good.
Phyllis: Sounds good.
Scott: Sounds like you are already in the right kind of set up. You're already working with somebody that is charging a fee, is agnostic on what's inside the accounts, is making changes based on your best interest.
Pat: Not in what is the best interest of their company or themselves. What it basically gets down to is that they are not taking income from another source.
Pat: You are the only one that is paying them for their services. So we appreciate the call.
Scott: It sounds like you got the right kind of set up Phyllis, and we hope that this new Department of Labor ruling on fiduciaries will help a lot of other investors, as well.