Another swipe of the pen by President Trump will delay – indefinitely – a new rule that was intended to protect consumers from bad financial advice.
President Trump signed a “Memorandum on the Fiduciary Duty Rule” the same day he signed an executive order to re-examine Dodd-Frank regulations. This rule would require that financial advisers make recommendations based on their client’s best interest, instead of their own.
“The Fiduciary Rule” was written to force financial advisers to act more like fiduciaries, rather than greedy salespeople looking for the highest commission. But some experts say the industry was already moving toward a fiduciary standard with or without that rule – or it’s suspension.
How could this affect real estate investors, and those who invest other people’s retirement funds?
The directive comes from the idea that commission-based brokers and insurance agents make recommendations based on products that pay the highest commission. Under the rule, they would have to disclose any conflicts of interest, and they would have to recommend 401(k) plans, IRAs, and other investment options that provide the greatest benefit at the lowest cost.
Opponents say the rule will have an adverse effect on consumers with smaller portfolios because broker-dealers won’t want to take their business. There simply would be too much risk and not enough reward to work with lower income individuals – which could serve to greatly reduce their investment advice opportunities, and in turn, give them fewer investment options overall.
The Trump administration agrees. A white house official says: “We think this was a complete miss on what they were trying to do,” he says. “It took away a huge amount of investment options.”
Under the memorandum, the Labor Department must evaluate the rule to determine if it reduces consumer choices, harms consumers financially, causes disruptions within the retirement services industry, creates more lawsuits and increases prices for access to retirement services.
The analysis would, of course, take time and delay the implementation of the rule. It was supposed to go into effect on April 10. The memorandum delays its implementation indefinitely.
Forbes writes about how many financial advisers were concerned, at first, that the rule would have a negative impact on their businesses. But while they are still working under the old “suitability standard” they have been ramping up for this new “fiduciary standard” and some are already practicing it.
What should consumers keep in mind when they are seeking retirement advice?
People seeking advice need to be more vigilant and ask more questions. They should ask whether they are speaking with someone who’s serving them as a fiduciary or a salesperson. If they are not fiduciaries, investors should ask how they are being paid – whether their services are based on commissions or are fee-based. That’s often a percentage of the assets they are managing.
And when investors are considering a certain kind of investment product, they should ask for information about similar products from other providers. The fee-structure may be different from product to product and company to company.
Investors will find that some financial advisers no longer work for commissions and are compensated only by fees. According to Forbes, Merrill Lynch says it will end commission-based retirement accounts even if the Fiduciary Rule doesn’t survive.
Wealth Management.com also expects this trend to continue. It says many businesses have already made changes anticipating the implementation of the rule, and they will probably “not” undo those changes.
The Consumer Federation of America and other groups said in a statement that Trump’s order “threatens to strip working families and retirees of protections they desperately need when they turn to financial advisors for help with their retirement savings.”
They say the new standard “is already delivering real benefits to retirement savers.” They say costs are dropping and financial advisers are more likely to act in a consumer’s best interest.
By some accounts, more than $3 trillion worth of retirement plans are affected by this policy debate. Kaaren Hall of UDirect, a self-directed IRA company, says there is over $23 trillion in retirement accounts today, with most in traditional investments like stocks, bonds and mutual funds. Only a small percentage, 3 percent to 5 percent, are in alternative assets like real estate.
When investors choose to self-direct their retirement funds into real estate, they may invest their IRA’s or 401k’s into private placement syndications or crowdfunding portals. In those cases, be sure to check all fees have been disclosed within the offering documents. We recommend only investing in deals where the promoter gets paid profits AFTER the investors get their return of capital and preferred return.
This weekend, I had the opportunity to speak at CrowdConverge 2017 in Las Vegas, where I announced our new crowdfunding platform: www.RealWealthCrowd.com. There were many, many people in the audience who hope to raise money for their real estate deals. Some were highly experienced, and others were brand new to the business.
The SEC requires that you have a “pre-existing relationship” with the asset manager before you invest in any private placement. I told the audience to consider that no matter how good a real estate deal may appear; the experience and transparency of the asset manager is most important when considering an investment – just another reason to have that “pre-existing relationship”- so you truly know who you’re dealing with. Wall Street doesn’t always give us that opportunity.
About the Author
Kathy Fettke is the founder and co-CEO of Real Wealth Network, a passive real estate investing club with more than 24,000 members. She’s also the author of “Retire Rich with Rentals” and host of “The Real Wealth Show,” a featured podcast on iTunes with listeners in 27 different countries. Kathy is passionate about understanding real estate cycles so she and her members can invest in the best markets and best deals available today. She is frequently invited to share her expertise on CNN, CNBC, Fox News, NPR, CBS MarketWatch and in the Wall Street Journal. Kathy received her BA in Broadcast Communications from San Francisco State University and worked in the newsrooms of CNN, FOX, CTV and ABC-7. She’s past-president of American Women in Radio & Television. Kathy loves the freedom that real estate investing can bring. She lives in Malibu, California, with her husband and two daughters and enjoys traveling, hiking, rock climbing, skiing, figure skating and surfing. Contact her at firstname.lastname@example.org.