Figuring out how to save for retirement is challenging. Unfortunately, if you want to turn to a professional for financial advice, that creates complications of its own.
This is because there are many different types of professionals, such as certified financial planners, investment advisors, and financial advisors, and there are different regulations that govern each of them. Trust the wrong person can have devastating consequences.
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The good news is that the Biden administration has stepped in to give investors more protection against conflicts of interest. The recently finalized Retirement Security Rule aims to ensure that these professionals actually work for the clients they serve. This rule is not without controversy, as some argue that it could actually make it harder to get help.
To understand how the rule could impact you, read on to discover five important facts.
1. More advisors will be considered fiduciaries
A fiduciary is a person legally obligated to act in the best interests of the person whose money or property he manages. They are held to a high standard so people can trust them.
You might assume that anyone who provides financial advice in a professional capacity is a fiduciary. This is not the case with the current rule.
Currently, those who provide one-time financial advice are not considered fiduciaries, nor does the law require a fiduciary standard for those who advise workplace plan sponsors about 401(k) rosters or anyone who provides recommendations for purchasing non-securities, such as real estate, fixed income annuitiesor commodities like gold.
“The regulation closes the one-time advice loophole,” the U.S. Department of Labor fact sheet said, adding that financial service providers often have “a strong economic incentive” to recommend that investors transfer their retirement accounts to work. to one of your institution’s IRAs. or annuities.
The Retirement Security Rule expands the definition of fiduciary to include any financial service provider who is compensated to advise individual retirement account owners, employers, and plan fiduciaries.
2. Require investment advisors to work for you
The new rule also clarifies the exact duties advisors owe you when acting in their fiduciary roles. Your duties include providing advice that is:
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Prudent: Meets professional standards of service.
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Loyal: Your interests are put first and consultants clearly disclose any potential conflicts of interest.
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Honest: the consultant is not misrepresenting any information
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Fair price: consultants cannot charge too much or receive unjustified or excessive compensation.
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3. It could save Americans money
When investment advisors act in consumers’ best interests — rather than recommending investment products to earn a large commission — consumers can save. Exactly how much depends on where you invested.
Morningstar, Inc. estimates that participants in workplace retirement plans could save up to $55 billion over the next ten years thanks to the Retirement Security Rule. It states that more than 80% of these savings would be experienced by participants in small plans, of which there are currently more than 20 million. Investors could save up to $5 billion annually that is lost due to conflicting investment advice on fixed-index annuities, according to the Council of Economic Advisers.
4. It could make it difficult to access advice
The rule looks pretty good so far, so why is it controversial?
Several lawmakers and industry groups argue that this could actually make accessing retirement advice more difficult for the average American.
“This leaves retirement savers with fiduciary advisors as their only option for professional financial guidance,” according to a declaration by the American Council of Life Insurers. “Fiduciaries typically work with clients with a minimum of $100,000 to invest, far more than most working-class Americans have in savings.”
Senator Joe Manchin also warned in a statement“If it goes into effect, the rule has the potential to cause many West Virginians to actually lose access to investment advice because of how broadly the rule defines fiduciary. Hardworking West Virginians and Americans need protection, not uncertainty when it comes to their long-term financial security, and they certainly don’t want or need the federal government to be further involved in their personal retirement decisions.”
5. Comes into force in September 2024
If you’re hoping these new protections will keep you safe from bad advice, don’t call an advisor just yet. The rule takes effect on September 23, 2024, although it will take another year for all requirements to take effect.
Once the rule is in place, you can feel more confident that the professionals you hire will act in your best interests. However, it is still important to research any provider you will receive advice from and understand how they charge and what their legal obligations are to you.
O The right advisor can make all the difference in building your financial security, but ultimately it’s your money that’s at stake, so doing your due diligence is crucial.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
