There has been a lot of talks lately about the upcoming fiduciary rule the Department of Labor will be implementing, and a lot of speculation about whether President Elect Trump will take steps to overturn when he takes office in January. While there is plenty of room for speculation about the future of the fiduciary rule, financial planners and wealth management firms would do well to prepare for its implementation now.
Even if the fiduciary rule is eventually changed or overturned entirely, time is growing short for its upcoming implementation. As it stands now, the Department of Labor's fiduciary rule is slated to take effect in April of 2017, and it is extremely unlikely that Congress or the President will act to stop it in such a short time frame.
For better or worse, the Department of Labor and its fiduciary rule is here to stay, and it is important for everyone in the financial planning community to get ready for its implementation.
Some have questioned the necessity of the upcoming fiduciary rule, especially the many financial planners who already put the best interests of their clients first in making investment decisions. Even as they passed the new fiduciary rule, regulators from the Department of Labor admitted that the vast majority of independent financial planners and wealth management firms are honest and trustworthy and that they have the best interests of their clients at heart.
So why the need for the new fiduciary rule, and the huge amount of paperwork and confusion its implementation is likely to generate? As with every industry, there are a few bad apples in the financial planning industry, and their shady tactics and questionable investment advice shine a bad light on their more honest peers.
There is a strong case for regulation of financial planners, and in the long run, the new Department of Labor fiduciary rule should help the best planners and wealth managers. Once the rule is implemented, and financial planners are required to put their clients' best interests first, the cream should quickly rise to the top.
Once the fiduciary rule and best interest regulations are in place, clients will quickly find out whether their financial planning and wealth management firms are up to the task. The planners who do the best job and make smart investment recommendations will gain new business through word of mouth and personal recommendations, and the shady operators should see their business dwindle.
With the shift from traditional defined benefit pension plans to defined contribution arrangements like 401(k) and 403(b) plans, the need for sound financial planning and honest investment advice has never been greater. American workers now have trillions of dollars worth of wealth tied up in their self-directed retirement plans, and they need solid advice to make the most of that money and enjoy a financially stable retirement decades down the line.
Depending on the outcome of their investments, the shift from pensions to defined contribution plans can either be a good thing or a bad thing. Workers who get solid investment advice and work with a great financial planner could see far better results than they would have in a traditional pension plan, with a higher monthly income and enhanced stability for their monthly retirement paychecks.
Those who work with an unqualified financial planner, and those who fail to plan at all, stand to do far worse than their pension-earning peers. The most oft-cited downside of defined contribution plans is that they shift the burden for decision making, and the risk of making poor decisions, from the employer to the employee.
Since many employees are ill-equipped to make such life-changing financial decisions, they turn to professionals who do have the training, the education, and the expertise to make such decisions. That is where the new Department of Labor fiduciary rule comes into play.
By standardizing the rules for the financial planning industry and imposing a basic level of regulation, the Department of Labor hopes to level the playing field and make it easier for the average worker to trust the advice they are receiving.
It is important to note that the new Department of Labor fiduciary rule only applies to retirement accounts like 401(k) and 403(b) plans, and not to non-retirement savings and investments. In passing the fiduciary rule in this manner, the Department of Labor noted that workers tend to accumulate larger balances in their retirement accounts, and therefore there was a need for a greater level of protection for these plans.
While the implementation of the new Department of Labor fiduciary rule may be complicated and difficult in the beginning, at the end of the day, the new regulations should be a positive move for honest financial planners and wealth management firms. The vast majority of such firms already put the needs and best interests of their clients first, so the new fiduciary rule should have little practical impact on their practices.
There will be additional paperwork and a great deal of client education, but in the end, the results of the new Department of Labor fiduciary rule should be positive. With the new regulations slated to go into effect in April of 2017, many financial planners and wealth managers are already busy changing their practices, drawing up their new best interest forms and educating their clients on the upcoming changes.
Like every other piece of regulation emanating from the Federal government, the new Department of Labor fiduciary rule can be viewed as overreach, and even as tampering with the free market. It is important to remember, however, where the need for the rule came from, and that in the end it should help the best financial planners gain new clients and make their firms even more successful.