June 2016: Guest Essay

Long overdue help for retirement savers

P.J. Banazek

P.J. Banazek

When visiting the doctor, most people do so without giving any thought as to whether the advice and course of action outlined by their physician is in their best interest. People do not give it any thought, as there is very little reason to believe that the advice given by the doctor would not be in their best interest. While we as patients might not like the advice, and may in fact choose not to follow it, it is not because we believe that the doctor has some ulterior motive.
The doctors’ relationship to the patient is that of a fiduciary, which is defined as a person in a relationship of trust. The legal obligation of a fiduciary is to act in the best interest of the person who placed their trust in them. In medicine, physicians take the Hippocratic Oath. When we visit a doctor, a lawyer or a CPA we do so with the benefit of knowing that their role is to give us the best advice they can to the best of their ability. Unfortunately that trusted relationship is not required when you visit your financial advisor. Thanks to the Department of Labor this is about to change for anyone seeking advice for their retirement investments.

In April of this year the Department of Labor issued new rules requiring that any financial advisor who is providing investment advice to a retirement saver must act in their best interest. This is a big change that has been long overdue. There are countless studies telling us that the average U.S. worker is not adequately prepared for retirement. There are also a number of studies showing investors and savers are hesitant to work with advisors due to a lack of trust and understanding of how they can help.

Yet other studies show the value of a good advisor to be well worth the cost of hiring the advisor. In fact one study done by Vanguard, the champion of low cost investment products, quantifies the value a financial advisor can add though sound advice to be the equivalent of 3 percent annually.

It is impossible to detail the new rules in this column as the document from the DOL is more than 1,000 pages. However, what’s important for investors to understand is what the DOL was trying to fix with this new rule. The primary concern was to provide an environment where investors are provided protections in regards to the advice that they are given by financial advisors. Prior to this rule an advisor only had to meet a standard of suitability in selling an investment. I have personally helped enough people remove themselves from costly and inefficient investment products that it leads me to believe the old standards of suitability are not strong enough. Too often advisors, tempted by products with high commission payments, recommend an investment solution that, while suitable, may not be the most appropriate path for the investor. The new rule intends to raise the bar significantly for an advisor who wants to provide advice to retirement accounts.

When this rule takes effect next year what should you expect from your advisor?

A clear understanding of the full cost of the investment solution that your advisor is suggesting. An advisor will have to disclose their fees plus any fees embedded in the investment products that they are providing.

A clear representation from your advisor that the investment advice that they are providing to you is in fact in your best interest.

This rule change is something that can have a tremendous positive impact in helping people better prepare for retirement. I believe that in a few short years the result of this very complicated rule will be that retirement savers are receiving better advice and guidance because their advisors are acting as true fiduciaries.

P.J. Banazek is a managing director at the Morgia Group, a Watertown-based Wealth Management Advisory firm. Contact him at pjbanazek@hightoweradvisors.com. Securities offered through HighTower Securities LLC. Member FINRA/SIPC/MSRB, HighTower Advisors LLC is an SEC registered investment adviser.