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Tuesday, December 11 , 2018, 12:25 am | Fair 46º


Karen Telleen-Lawton: What’s a Fiduciary?

If you’re squeamish about the stock market, you may not follow financial news at all. Nevertheless, an important change is coming complements of the Department of Labor.

The change regards who is a fiduciary, and it affects you.

Investopedia defines a fiduciary as one who is responsible for managing others’ assets, so most savers are not fiduciaries. However, you need to know about those who are fiduciaries for you, including managers of your IRAs, 401(k) or other investment accounts.

The Securities and Exchange Commission rule requires that a fiduciary’s investment recommendations be in the client’s best interest. This straightforward rule is not changing.

What is changing is who is considered a fiduciary. Up to now, many financial professionals, including those who advised rollovers from 401(k)s and IRAs, were required to recommend investments that were merely “suitable” for a client. 

This distinction becomes important when an advisor receives a commission for a product that is “suitable,” but an alternative product (for which maybe she or he won’t receive a commission) would have been a better choice for the client.

The Council of Economic Advisers found that conflicted advice costs the public something like $8.5 to $33 billion annually, mostly from higher fees and sub-par returns.

Finance corporations are fighting the change based partially on potential unintended consequences. There may be more people who do not get the financial advice they need.

Joe Tomlinson, an actuary and financial planner in Maine, sees several pathways to close this “guidance gap,” all of which could help small investors get the advice they need in an unbiased way. 

Using online advisors (the robo approach) is an option that works to encourage savings, asset allocation and periodic rebalancing. Rolling out those dollars in retirement, however, requires a more personalized approach. Various pockets of assets need to be coordinated with social security and each other.

Financial guidance is the strategy of providing people with the information they need to make decisions on their own. Large employers often play such a role.

This method could be augmented for small employers and independent investors by the finance industry, academic institutions and independent financial advisors. Of course, this guidance needs to be free of sales bias.

Another option is embracing Thrift Savings Plans for the general public. TSPs are generally available to federal government employees, encompassing portfolio options like low-cost index funds, target-date funds and annuities for turning savings into lifetime income. This type of plan was proposed last year by Senator Marco Rubio.

Going a step further is subsidized financial advice, an option outlined convincingly by economist Robert Shiller in the past several years in The Economist and The New York Times

Tomlinson believes all four proposals are mutually supportive. 

“If we set up a public option that gains widespread acceptance,” he writes, “it would help the robo-approach and advisor-based guidance to be much more focused. Shiller’s subsidy proposal would also fit best with a simplified retirement-savings plan structure so that planning services could be delivered efficiently.”

In the end, broadening the reach of the fiduciary rules can only be good because it forces honesty in dealing with clients. It does, however, require everyone to increase their financial IQ.

It’s important to ask the manager of each of your accounts whether they are adhering to a standard of suitability or as a fiduciary: in your best interest.

If the answer is “suitability,” you should have several more questions!

— Karen Telleen-Lawton’s column is a mélange of observations spanning sustainability from the environment to finance, economics and justice issues. She is a fee-only financial advisor (www.DecisivePath.com) and a freelance writer (www.CanyonVoices.com). Click here to read previous columns. The opinions expressed are her own.

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