What Will the New Fiduciary Rule Mean for You?

Much has been discussed about the Labor Department's recently finalized fiduciary rule, which will hold all financial advisors who provide retirement investment advice to a "fiduciary standard" -- or in other words, require them to put their client's best interests above all else.

This has caused some scrambling, especially for individuals and firms that are incentivized by commissions and other sales goals. The Labor Department asserts that with the end of these arguably unethical practices comes the opportunity to save investors as much as $40 billion over 10 years.

This is a step in the right direction for the investment management industry. Financial advisors should be on the same side of the table as the client, and this rule clarifies many gray areas about how investors should be advised and served.

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What does the fiduciary rule mean for wealthy investors? Mass affluent and high net worth individuals stand out as the biggest beneficiaries. There are countless tales of investors who say they were treated unfairly by their advisors -- receiving products that didn't meet their needs and finding out about misleading or hidden fees only after it was too late. Many of them were recommended unsuitable investments, like variable annuities, by advisors who had the wrong incentives.

Under the fiduciary rule, brokers will be required to disclose fees up front, and this will make it harder for them to justify pricey and often ill-suited investments to clients.

Lifetime income products aren't the only products investors should be cautious about. In one case, an 86-year-old woman with $1.6 million in assets was sold nearly $800,000 worth of illiquid, non-tradable real estate investment trusts. She had been seeking yield and income, and didn't understand that the REITs, which comprised half of her portfolio, were illiquid. Not only did her advisor mislead her about the nature of the product, but he also scored a large commission that likely reached between 5 and 10 percent.

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Just because a client has $1 million in assets and is technically considered an accredited investor, he or she shouldn't necessarily invest in alternatives such as hedge funds or private equity. Even some clients with as much as $5 or $6 million in assets do not have the risk capacity or propensity needed to invest in these alternatives, which quite often are illiquid and come with high fees.

Accredited investors shouldn't hesitate to question or challenge their financial advisors so they aren't guided into investments that aren't the best fit for their financial goals.

What does it mean for my 401(k) plan? The wealthy aren't the only people who will benefit from the passing of the fiduciary rule. The rule will also benefit the millions of Americans who are saving for retirement through their IRAs and employer-sponsored 401(k) plans.

In a recent study, the White House Council of Economic Advisers estimates that conflicted advice for retirement savers causes significant underperformance, reducing investment returns by roughly 1 percentage point per year.

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The fiduciary rule established a line between financial advice and education, which will allow plan advisors and sponsors to provide basic information to participants. It would generally be seen as a fiduciary act for an advisor to make an investment recommendation or suggest rolling assets over from a 401(k) to an IRA.

What still needs to be done to ensure investors are protected? The fiduciary rule clearly represents positive change for the industry, but the issue of financial literacy persists. The best investors are educated and empowered consumers of financial advice. Well-informed clients are better equipped to choose the best advisors, ask the right questions and stick to their financial plans.

While SEC-registered investment advisors will be required to follow the newly passed rule, brokers and insurance agents will be held to a less stringent "suitability standard" at this stage. Investors should feel comfortable asking financial professionals if they are held to the rule and how they are compensated.

All investors, regardless of income, assets and education, deserve to work with honest and trustworthy financial professionals. If your advisor refuses to communicate openly or regularly, you may want to consider taking your money elsewhere.

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Masood Vojdani is a contributor to The Smarter Investor blog, and founder and CEO of MV Financial, an asset management firm based in Bethesda, Maryland. MV Financial provides investment and advisory services to retail and institutional clients.