Still Wondering What The Fiduciary Rule Is? You’re Not Alone

Wall Street Fiduciary Rule

Managing Director Scott Puritz talks to Alessandra Malito at Marketwatch about the importance of fee disclosure when it comes to your relationship with your financial advisor, and how the U.S. DOL’s “fiduciary rule” will empower you to make better retirement investment decisions.

For all of the hand-wringing about the Department of Labor’s fiduciary rule, a surprising number of people don’t know what it is. And that ignorance may affect your retirement savings.

Only 32% of adults had heard of the fiduciary rule, according to a survey of 1,000 adults conducted on behalf of one of the original retirement robo advisers, Financial Engines. FNGN, -1.01%  Of those surveyed, 22% worked with a financial adviser and 21% knew the difference between an adviser who acted as a fiduciary and one who did not.

“These are things people don’t pay a lot of attention to unless you are in the industry in some way,” said Chris Jones, chief investment officer at Financial Engines. The financial services industry has done a good job of obfuscating the importance of fiduciary responsibilities, he said.

So what’s the fiduciary rule? Here’s a refresher: The fiduciary rule is a highly contested piece of legislation, produced during President Obama’s presidency and managed by the Department of Labor, focused on mitigating conflicts of interests that may arise in financial advisers’ investment recommendations on retirement accounts. Not even two months after Trump’s inauguration, the Department of Labor announced it would delay the implementation — originally set for April 10 — until June 9.

The prior administration had argued the rule would protect retirement savers from losing $17 billion a year to conflicts of interest, which could come from commissions earned on product recommendations. Critics, on the other hand, said it would orphan small accounts that managers deemed too costly to manage, and shrink the variety of investment options savers have.

There is a disconnect between what investors believe to be true of their adviser’s responsibilities — and what’s actually true. For example, respondents were asked if all financial advisers are legally required to put the best interests of their clients first when they give advice on retirement investments — 53% said that was true, 47% said it was false. (It is false — not all advisers are legally required to act in their clients’ best interests). Here are some takeaways from the Financial Engines survey:

If your financial advisor was not a fiduciary, would you:

Continue working with that person in the same way you do now 12%
Ask more questions about the investments your advisor recommends 47%
Switch to another advisor 24%
Stop working with a financial advisor altogether 18%

Financial Engines has openly supported the fiduciary rule, as have others, including New York-based robo adviser Betterment and New York-based financial services firm Merrill Lynch BAC, +1.83%  , the latter of which said it would no longer allow clients to open commissions-based individual retirement accounts. Other firms, including New York-based firm Morgan Stanley MS, +0.77%   and San Francisco-based firm Wells Fargo WFC, +0.72%   say they would continue to allow commissions-based accounts but use the “best interest” contract, which clients sign indicating they accept adviser’s terms.

In order to educate more investors, the industry needs to improve transparency and communication efforts with investors, said Scott Puritz, managing director of advisory firm Rebalance. “Fiduciary” can be an intimidating word, as can investing in general, he said. The firm released its “Dear Advisor” campaign in February, which is a letter investors can give their advisers to learn if they’re a fiduciary and what they are paying in fees. “The challenge is to make it in plain English.” (For example, when Financial Engines asked survey participants if they’d support requiring all financial advisers to provide advice on retirement assets be legally required to put their best interests first, 72% said yes, 7% said no and 21% said they were indifferent.)

We are fighting an uphill battle,” Puritz said. “Consumers think the other options are free because so many costs are hidden and that’s deliberate.”