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Trust in Brokers: Your 401(k) and the New Fiduciary Rule


Physicians have long trusted financial advisors to offer wise financial guidance, but a new rule aims to ensure brokers look first and foremost at their clients' best interest.

A broker will no longer be able to direct a client to a suitable 401(k) investment that pays back high fees to the broker. This is due to the new Fiduciary Rule, which puts a clients' well-being ahead of the broker

Confidence in the Investment Industry, 2015

A December 2015 Gallup consumer survey found that physicians were believed to be trustworthy and act ethically by 67% of respondents. Only 13% said the same of stockbrokers. Below them in the respondents’ ratings were car salesmen and telemarketers.

It seems stockbrokers can’t fall much further. This and other similar results in the past should have alarmed the investment industry. If it did, there were no real signs of a change to make its ratings better, just glowing promises advertised by investment firms that may or may not have materialized. Though the industry, on its own, did not do anything to improve these ratings (one assumes because they were/are satisfied with the status quo), there is a regulatory shift that will affect them and they will have no choice but to comply.

The Fiduciary Rule, 2016

The Department of Labor has come down on the financial industry by passing the Fiduciary Rule that applies to those that give 401(k) advice and recommendations. It mandates that brokers and other financial professionals that are not now bound by a fiduciary obligation to their customer must now act in their client’s best interest rather than their own. Previously, they only had to choose suitable investments for clients. This means that not only could it be appropriate for the client but also it could be the one with the highest commission or front-end load, etc. In other words, the broker/seller could give himself a monetary reward for her services above her usual broker salary. Now, with the new Department of Labor ruling, brokers must also act as fiduciaries for their clients 401(k)s. This means that the product recommended by the financial professional must not only be suitable for the client but in their best interest. No higher end loads or continuing fees or back end loads for the recommending broker. Low-cost passive indexes will begin to take their place. The result will likely be a broker who will not only make less money but will be burdened with more paperwork to document choices.

Many financial professionals aren’t happy about this, and a group of business organizations is expected to sue over the regulations.

Some worry older advisors will leave the industry to avoid what they could consider a hassle. If that happens, younger brokers without a history of a high income for little work will begin to take their place. Their expectations will be less and perhaps they will find happiness in actually helping people rather than seeing them as cash machines.

I say this because I will never forget the deep impression a training tape at one of the investment firms I worked at made on me. It described “the gold plated doctor” as a target for financial advisors. Since I was a physician before I was a broker, this callous statement cut me as I realized my colleagues with whom I had worked and whom I respected were being thought of fodder for a financial kill. This struck me as wrong. Brokers and other financial professionals receive much less training than physicians and yet, often, make as much or more money than doctors. One way they do this is by putting clients in so-called “suitable investments” that are not necessarily the best for that particular person. The Fiduciary Rule hopefully will dramatically diminish or altogether cease this type of behavior.

Confidence in the Financial Industry Going Forward

Of course, not all financial professionals have been seeking high returns for little work. There are some who have always had their client’s best interests at heart. This group, whatever the size in the past, will be on the rise. The Fiduciary Rule will make it happen. As an outcome, when consumers see that their portfolios are increasing as their fees are decreasing, they will be able to have more confidence in their brokers and the financial industry as a whole. Unless, of course, financial professionals find a work-around for their own benefit. I hope that is not the case, but if so, at least our government made in stab in the right direction in trying to benefit 401(k) participants.

For More:

Could the New Fiduciary Standard Impact You as an Investor?

The 401(k) Scoop: Care Now or Pay Later

Putting the Fiduciary Back Into Financial Reform

President Obama Joins the 401(k) Fight

Making Your 401(k) Money Work Smarter

Obama Wants Rules That Force Brokers to Put Clients' Interests First

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Victor J. Dzau, MD, gives expert advice
Victor J. Dzau, MD, gives expert advice