President Obama Orders Fiduciary Standard

So what does that really mean?

President Obama Orders Fiduciary Standard

Frustrated that millions of hard-working Americans find it more difficult than ever to get effective financial advice - a problem I've been sharing with you for years - President Obama has thrown the weight of the presidency behind this issue.

You struggle to save money for retirement. You turn to financial advisors, often provided by your employer, for help with your 401(k), 403(b) or 457 plan. The financial advisor tells you which investments to buy – from a narrow list provided by a mutual fund company or insurance company.

But might the advisor steer you to expensive funds so he can make a bigger commission? Would you even know it if he did?

That was a point of the president's 17-minute speech, given at AARP’s headquarters last week.

"There are a lot of very fine financial advisors out there, but there are also financial advisors who receive backdoor payments or hidden fees for steering people into bad retirement investments,” he said. "You’ve done the right thing. You’ve worked hard. You’ve saved what you could. You're responsibly trying to prepare for retirement, but because of bad advice, because of skewed incentives, because of lack of protection, you could end up in a situation where you lose some of your hard-earned money."

So, the president said, he’s ordering the Department of Labor to offer new rules. (As you can imagine, the financial services industry hates many elements of DOL’s proposed rules, and I will say that they do make some valid points.)

But let’s not focus on the policy-making in this blog. Instead, focus on this statement:

“It's a very simple principle,” President Obama said. “You want to give financial advice, you’ve got to put your client’s interests first. You can't have a conflict of interest."

Amen!

The President of the United States told the nation that a lot of people are calling themselves financial advisors, but in fact are nothing more than financial-product salespeople.

Oh, and although the president didn't know he was doing it, he endorsed Edelman Financial Services. How so? Because he said that you need to hire an advisor who's a Registered Investment Advisor. And that’s us.

You need to hire an adviser who is not compensated from transactions, who doesn't receive payments from a third party, often without your knowledge. That’s what the White House Council of Economic Advisers said in its 37-page report released in tandem with the president’s speech.

And we couldn’t agree more. In our view, serving our clients' best interests is the only appropriate way to conduct business.

So, you need to understand two things.

  1. There are two different kinds of advisors out there: those who adhere to the fiduciary standard, and those who don't.

    The fiduciary standard simply means that I put your best interests first. Not the interests of ourselves, and not the interests of our firm.

  2. Make sure your advisor is a Registered Investment Advisor, not someone who merely holds a securities or insurance license.

I do have one worry about the president's speech: some people might draw the wrong conclusions. Consider the next-day’s headline from USA Today. It read, "Bad Advice Costs Billions."

Might consumers think that they shouldn't obtain advice from anyone? Or that they shouldn't invest in retirement plans? That would be even worse than the current situation!

So, your take-away: Comparison shop for an advisor, like when you buy a washing machine. Ask questions. Here are the 18 questions to ask when choosing an advisor.

If you'll take this simple step – ask questions - you will dramatically increase the chance you'll achieve retirement success.