As an attorney, I’m often interacting with other professionals in my clients’ lives. In reflecting on these interactions, I sometimes wonder if my clients’ financial professional is doing what is in their best interest.
In looking in to it, I discovered that the rule governing financial professionals for quite some time has been to recommend investments that were “suitable” for their clients – a pretty broad standard.
Now, The Department of Labor has issued new rules going into effect in April 2017. These rules require financial professionals who offer advice related to retirement and savings to do so in their client’s “best interest.” In short, they are not required to act as a fiduciary.
What is a fiduciary? Simply put, someone who must act with the highest standard of care under the law.
Previously, financial advisors could recommend more expensive investments, because it was “suitable,” even though it may not be the best option for the client. Going forward, advisors will not be able to accept any compensation unless a contract is drawn up and executed agreeing to place the client’s interests first.
In the short term, the new rules will apply only to tax-advantaged retirement accounts (like IRAs and 401(k)s), but we’re hoping that other investments will soon be included in the new standard in the not-to-distant future.