The U.S. Dept. of Labor passed a new regulation requiring financial advisors to always act in the best financial interest of their clients. This regulation went into effect 7 months ago, called the “Fiduciary Rule,” it is 1,000-pages long and is supposed to improve the quality of investment advice. Although this sounds like a great idea, Fidelity Investments surveyed 485 advisors about how they are responding to this rule:
- 75% Say their cost of compliance will go up
- 62% Will fire their small clients
- 73% Expect it to have a negative impact on their business
- 58% Expect their income to go down
Many smaller advisor firms are expected to close and the remaining larger firms will service only wealthier clients who can afford the new higher fees.
So the unintended consequence of this regulation is: an increasing number of people will be left with no financial advisor that they can afford. For example, State Farm is laying off 12,000 agents and will only offer a reduced number of products through a self-directed call center. Rules now require insurance products to be labeled equity products that may confuse consumers as well.
The regulation increases transparency as advisors disclose all of the ways they are compensated by different products, but you may have to actually ask for this information to get it. Fee-only financial advisors believe this regulation tilts the industry more in their favor. Opponents call the regulation, “Obamacare for your 401(k): complex rules that limit your choices and raise your costs.” Many are hoping that President-Elect Trump will cancel the regulation once he takes office.
However it shakes out, companies are spending a fortune for ongoing compliance with this regulation and somebody has to pay for that, who do you think it will be?