The long-running game of “will it, will it not” is over: The fiduciary rule is now live.
The initial rollout of the rule, which was designed under the Obama administration to protect retirement investors from unnecessarily high costs and conflicts of interest in the financial advice industry, was delayed in April after President Trump asked the Department of Labor to reevaluate the rule.
That review is expected to continue through Jan. 1 of next year, but portions of the rule took effect June 9.
Here are three reasons investors should care about this rule.
1. Your adviser will now have to act in your best interest. You might think your adviser was already doing this, and in many cases, you would be right. But under the fiduciary rule, it will be a matter of law. Formerly held to only a suitability standard, advisers who provide advice to retirement savers will now be required to be fiduciaries.
The difference is notable. Under a suitability standard, advisers can recommend the investment that pays them or their firm the highest commission, as long as it is suitable for your needs. Under a fiduciary standard, the adviser focuses solely on what is best for you, which can lead to lower costs and better products.
The fiduciary rule applies only to advice involving investments in retirement accounts, such as IRAs.
2. It will bring transparency to fees. Conflicted advice often means lower returns and higher fees for investors, according to a report by the Council of Economic Advisers.
While the rule continues to be evaluated, financial firms and advisers have to comply with impartial conduct standards, which cover the best interest provisions above and limit advisers to “reasonable compensation.”
The rule also prevents advisers and firms from making misleading statements about transactions, compensation and conflicts of interest. If you work with an adviser, you’ll see more disclosures and paperwork outlining fees and commissions.
The rule could push high-fee, low-performance investments out of retirement accounts, particularly rollover individual retirement accounts, which are typically a breeding ground for the sale of these products.
3. It is no substitute for vigilance. The fiduciary rule’s final fate is still uncertain. In the meantime, it provides a layer of consumer protection that wasn’t previously available to investors. But it doesn’t eliminate the need to do due diligence where your money is concerned.
Even in its final form, the fiduciary rule won’t apply to nonretirement assets, like taxable brokerage accounts. It doesn’t have a significant impact on IRAs you manage yourself, as the rule mostly deals with advice. In either situation, you are still responsible for policing fees and, in the case of nonretirement accounts, ensuring your adviser looking out for you.
Where the fiduciary rule does apply, it doesn’t suggest that every fiduciary adviser is the right financial adviser for you. It also doesn’t eliminate commissions or proprietary products, like mutual funds offered by a financial firm and pitched by that firm’s advisers.
That means investors should continue business as usual: Carefully vet anyone who manages your money.
Arielle O’Shea is a staff writer at NerdWallet, a personal finance website.