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Want Retirement Planning Advice? Don’t Ask Your Broker

In April 2016, the U.S. Department of Labor (DOL) issued final regulations about investment advice and fiduciary duties in workplace retirement plans. Although well-intentioned, the regulation has the unintended consequence of restricting or eliminating personalized retirement advice for millions of Americans, and you may be one of them.

So, what happened? Generally, under the DOL's regulation, any individual who receives compensation for making individualized investment recommendations to employers, participants of workplace retirement plans, or IRA owners for consideration in making investment decisions is a fiduciary.

So, what’s a fiduciary? Investment Advisers, who are regulated by the U.S. Securities and Exchange Commission (SEC), and many state financial regulatory agencies, are fiduciaries to their clients, and must act exclusively in their client’s best interests. This approach is known as a, “best interest standard of care.” Moreover, under federal laws which govern workplace retirement plans, fiduciaries must act exclusively in the best interests of plan participants and their beneficiaries.

This sounds pretty good, right? Often it is very good, but hundreds of thousands of financial professionals across the United States cannot engage with their clients as fiduciaries. Why? The vast majority of financial professionals in the United States are regulated by the Financial Industry National Regulatory Authority (FINRA), which adopts a, “suitability standard of care,” rather than a, “best interest standard of care.” In fact, most brokers with large well-established financial institutions cannot provide fiduciary advice to clients -- securities licensing, compliance rules, and/or regulations preclude it.

So, which standard of care is better, the SEC’s or FINARA’s? One standard is not necessarily better than the other -- it all depends on the unique objectives of the client, but the DOL has certainly made its opinion known.

If nothing else, the DOL’s fiduciary investment advice regulation exempts certain forms of general investment education and financial wellness materials, so participants will not be entirely left to fend for themselves. But, who wants general investment education? Sadly, it seems the quality, relevance, and personalization of investment advice available to you within workplace retirement plans will depend on who your employer or its plan administrative committee has hired. Many of those chartered with responsibilities for making those hiring decisions may not even know you.

If you do not want others to determine your financial future and the advice available to you, consider rolling over any workplace retirement plans of former employers. Under a rollover IRA, at least you have control over choosing your service provider and financial advisers, rather than leaving those decisions in the hands of others, who may be complete strangers.