Over the last few years, the Federal Government has been working on the Department of Labor (DOL) Fiduciary Rule. April 1st, 2017 is the first date of enactment and every financial firm in the US must comply. Today, the DOL rule only applies to Retirement Accounts; 401k, SEP, Profit Sharing Plans, and IRAs. We apply the rule to all fee-based accounts, assuming the Rule will be applied to all accounts in the future.
In the most general sense, it requires the Advisor to act in the best interest of the client. According to the Consumer Federation of America (CFA), the DOL Fiduciary Rules key benefits to investors will be:
- Retirement Savers will know that
whomever theyturn to for advice has to act in their best interests
- Workers who change jobs won't be lured into rolling their money out to their pension or 401k plan and into a higher cost IRA
- Employees of small businesses should see better investment options in their company retirement plans
- Retirement savers will be able to trust their advisors, who will have far fewer incentives to offer advice that is not in their clients’ best interests
- Retirement savers will be put into the type of account that is best for them, and not just the account that is more profitable for the financial firm
- Investment product development will work to benefit, rather than harm, investors
The DOL is now forcing all Advisors to have a fiduciary duty to the client and act in the clients’ best interest. The goal is to eliminate conflicts of interest and commissions are considered a conflict. It also aims to reduce overall COSTS to the Investor.
These new regulations will force Advisors to move their practices toward
Conversely, in setting these golden standards that are meant to protect clients, the cost of regulation does not come without a price. There will be increased costs to Investors.
Client Cost Typically Include:
1. Fund Cost: These are the costs the Mutual Fund, ETF, have pertaining to the investment vehicle is in your account
2. Platform Fee: These are costs the Custodian (a firm that holds your investments) charges to transact trades, report to
3. Management Fee: This is what your Financial Advisor charges to manage your accounts.
The Platform Fee, Is Where DOL Rule Comes Into Play
This includes the costs for trading, reporting, and monitoring your accounts.
The DOL Rule will affect ALL advisors, and every investor will incur increased costs.
For smaller accounts, Advisors will be rolling out Robo Accounts at much lower costs. These are strategically managed portfolios made up of ETFs (Exchange Traded Funds) where the investor goes online to set up accounts, input their risk perspective, timeline and choose portfolios. There are no “Risk Managers” in these accounts.
As Bob Dylan sang, “The Times they are