The Obama administration's new $12 trillion-dollar rule highlights a major misconception people have about financial advice
Only retirement accounts.
While this may be "a huge win for the middle class," as Labor Secretary Thomas Perez told reporters on Tuesday, it also highlights a major misconception many people have about paying for financial advice: Consumers don't realize every financial adviser isn't required to always act in their best interest.
"The DOL regulation attempts to 'level the playing field' for everyday investors who hold some $12 trillion in IRA and 401(k) plans when it comes to their dealings with financial advisers," reports Business Insider's Elena Holodny.
Retirement accounts include 401(k) plans, individual retirement accounts (IRAs), and other tax-deferred accounts, such as health savings accounts.
For investments other than retirement accounts, you'll still need to verify that your financial adviser is bound to the fiduciary standard, which means they have a legal duty to act in your best interest. Those not working to the fiduciary standard are held only to a suitability standard, meaning their advice must be suitable for the clients' financial situation, but is not necessarily in their best interest. For instance, brokers operating under a suitability standard might let the commission attached to a product influence their recommendations.
As Chris Carosa, chief contributing editor to FiduciaryNews.com and author of "Hey! What's My Number?" explained to Business Insider, it can be difficult to verify, since many advisers are dually registered as a broker (only subject to the suitability standard) and a fiduciary.
Dually registered advisers can switch roles, thereby blurring the broker-fiduciary line.
"Identify whether your service provider is dual registered - a broker and an adviser - or just an SEC-registered investment adviser," Carosa says. "Work with just the SEC-registered adviser."
As Harold Pollack and Helaine Olen explain further in their book, "The Index Card,"
You need to ask and ask quite specifically: Do you work to the fiduciary standard at all times? This last part, 'at all times,' is important. As the fine print on brokerage forms indicates, the fact that an adviser commits to a fiduciary standard for some of her dealings with you does not hold her to this standard in others.
You can also look at the DOL's guide for consumers on how to tell if your adviser is working in your best interest.