So under the new rules from the Obama administration, financial advisers would be required to work in YOUR best interest? What a novel idea!
Once someone gets flung headfirst into the cold, cold waters of adulthood, there are certain things that come with that new phase in your life. One of those is financially planning for the future. Thus for many Americans, a financial advisor becomes a necessity in terms of planning for retirement and other future financial goals. But here’s the funny thing, not all financial advisers were required to invest in their client’s best interest!
No it’s true. In the past there was a sect of financial advisers known as “broker-dealers” that were penned as financial advisers, but were paid on commission, so often it was in their best interest to push products that were more expensive to their clients! This week however, the Obama administration looked to change that practice.
Under the new rules introduced by the Department of Labor, those being represented by financial advisers would be given the option to either sue or begin arbitration if they felt the advisers were not acting ethically in their best interests or not properly disclosing conflicts of interest when given fiduciary advice. The hope with this new rule is to give pressure to those financial advisers that don’t take their client’s best interest into account.
Over the last few decades, the role of financial advisers has become more prominent in the US due to many retirement plans going away from pension programs and toward 401 (K) savings plans. So bad advice from broker-dealers had become a major problem, so much so that a CEA Report claimed around $17 billion was lost by investors due to conflicting/bad advice given from their financial advisers (aka broker-dealers)!
As expected, many financial watchdog groups applauded the new rules from the Obama administration saying that it greatly protects regular people from predatory advisers, yet critics state that the new rules are more of a burden than anything else. Some critics even speculate that the new rules will make many financial advisers not want to take on middle-class clients in the fear of being sued. In turn they fear there’ll be less financial advisors in the industry, thus creating less financial advice, not better financial advice.
While a similar law in the UK did end up creating less financial advisers, that doesn’t necessarily mean that it was a bad outcome. For most financial accounts, experts predict that “blue-chip” programs with basic financial advice created by algorithms will work fine for most people that are just looking to save up their nest egg for retirement.
Regardless, broker-dealers have always been a problem when it came to financial advice. We’ll just have to wait and see if the new Obama administration measures are indeed effective.
(Photo Credits: Pixabay.com, Google Images)