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New federal rule protects consumers, shocks 70% of investment advisors nationally

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New federal rule protects consumers, shocks 70% of investment advisors nationally

Five questions your investment advisor should answer.

On April 6, 2016, the Department of Labor announced new rules about how financial advisors provide advice on retirement accounts like IRAs.  The new rule mandates that advisors must act as fiduciaries on retirement assets.  This means that advisors must act in the client's best interest.  Shockingly to many, this was not already the case.

Until now, stockbrokers, registered reps and commission-based advisors have been working under the suitability standard.  This meant that your rep could sell you a product if it was suitable for you, and 'suitable' had a loose definition. As long as it was a reasonably good fit, the advisor had no obligation to sell you the least expensive or best product for your needs. Under suitability, the broker's duty was to himself and the broker-dealer, not necessarily to the client. 

"Shouldn't all financial advisors always put their clients' interests first?"

The DOL is now implementing the fiduciary standard, which means the advisor must act in the best interest of the client.  With a fiduciary standard, the advisor puts the client's interests first, making sure clients' needs come before broker profits. Studies show that over 70% of advisors are opposed to the rule, which roughly correlates to the percentage in the commission-based business.  Registered Investment Advisors (RIAs) and fee-only planners have been using this standard for decades, charging a fee for investment advising, rather than a commission. Most consumers aren't aware there is a choice.

"We have seen a lot of people, particularly retirees, who were sold expensive, low-performing products," said Leon LaBrecque, managing partner and CEO of LJPR Financial Advisors, a fee-only RIA in Troy, Michigan. "I'm encouraged by the DOL development. Shouldn't all financial advisors always put their clients' interests first? This new rule is forcing that, and commission-based advisors are panicking."

LaBrecque believes the new rule will help clients understand the services they are receiving, and he urged all individuals with an IRA or a 401k to learn more about their advisor and the products they're buying. He also advised to watch out for a loophole, the best interest contract exemption (BICE), which allows an advisor to recommend products outside the clients' best interest if a form is signed.

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