Here’s what the Obama administration’s new $12 trillion rule means for your money

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On Wednesday, the US Department of Labor announced a new fiduciary rule, which will require investment advisers to put client interests above their own when it comes to investment choices for retirement accounts.

“The DOL regulation attempts to ‘level the playing field’ for everyday investors who hold some $12 trillion in IRA and 401(k) plans when it comes to their dealings with financial advisers,” reports Business Insider’s Elena Holodny.

A 2015 report from the White House Council of Economic Advisers (CEA) estimated that fees and conflicted advice costs American middle-class families about $17 billion per year, and decreases annual returns on retirement savings by 1 percentage point – an effect the new rule is meant to mitigate.

Here’s how the new rule may affect you:


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Your financial advisers are now subject to the fiduciary standard when it comes to overseeing retirement accounts

Before the rule, financial advisers were subject to a looser suitability standard when overseeing retirement accounts, meaning that they were obligated to recommend investments suitable for your situation. Now, brokers, registered investment advisers, insurance agents, or other types of advisers are subject to the fiduciary standard, meaning they must put your best interest first.

As Liz Davidson, founder of Financial Finesse and author of “What Your Financial Advisor Isn’t Telling You,” says:

Instead of investment advisers recommending an investment that is suitable for you, meaning it’s not unsuitable – it’s not something egregious or wildly inappropriate – the financial planner you have, as it relates to your retirement plan accounts, will have to recommend what’s in your best interest. That standard is much tighter than the suitability standard.

This means that if there are comparable investments to choose from, advisers will be focusing more on lower-fee funds. The DOL estimates that this could save investors up to $40 billion in fees over the next 10 years.


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You shouldn’t expect immediate changes

The rule will be phased in over time in order to give financial institutions time to adjust and alter their business models accordingly, Davidson says. The full requirements will go into effect January 1, 2018.

It can’t guarantee perfect financial advice

As NPR’s Chris Arnold reported, the proposed rule is over 100 pages long, which means loopholes could wind up in the final version.

Business Insider’s Elena Holodny writes:

According to WealthManagement.com’s Diana Britton and David Armstrong, the DOL “tweaked the final version to ‘minimize’ the compliance burden on firms and throw open the window to allow for a broader range of investments, including non-traded REITs and variable annuities, as long as advisers guarantee they are putting their client’s interests ahead of their own.”

That being said, the basic premise of the rule is pro-investor.


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You still have to verify that your financial adviser is bound to the fiduciary standard in regards to other investments

The new rule means that advisers must put your interests ahead of their own when it comes to overseeing retirement accounts, which include 401(k) plans, individual retirement accounts (IRAs), and other tax-deferred accounts, such as health-savings accounts.

When it comes to other financial advice, if you’re paying a professional, you’ll want to make sure you’re dealing with a fiduciary. As Chris Carosa, chief contributing editor to FiduciaryNews.com, tells Business Insider, it can be difficult to tell, since more advisers are dually registered as brokers – subject to only the suitability standard – and fiduciaries. Dually registered advisers can switch roles, thereby blurring the broker-fiduciary line.

“Identify whether your service provider is dual registered – a broker and an adviser – or just an SEC registered investment adviser,” Carosa says. “Work with just the SEC registered adviser.”

You can also look at the DOL’s guide for consumers on how to tell if your adviser is working in your best interest.


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The price of financial advice could change

Raising investment-advice standards will be a costly process for financial institutions. Opponents of the rule are quick to point out that this will increase the price of financial advice.

Business Insider’s Elena Holodny reports:

House Speaker Paul Ryan slammed the rule in his official blog back in March, arguing that the rule would disproportionately hurt low-income people.

The rule “creates more paperwork and costly record-keeping requirements for financial planners, restricting access to quality investment advice for upwards of 7 million Americans with IRAs,” he wrote in the post about the previously proposed version of the rule. And it “results in higher costs for people seeking financial advice, disproportionately hurting families with smaller bank accounts.”

But Davidson points out that “most lower income Americans are not candidates for financial advice the way the system works now because they don’t have enough money.”

In fact, she says, the rule could be a great thing for lower- and middle-class Americans, who can instead turn to the lower-cost services that continue to emerge while benefiting from the effect of fiduciary standards.

Davidson says:

The financial services industry is moving towards different, lower-cost means – there’s more financial education in the workplace, there are robo-advisers available, and non-profits are gearing towards helping people become their own financial planners. Lower and middle income families are going to have access to these low-cost services that are more holistic.