When retirement savers seek out investment advice, they expect and deserve to be able to rely on that financial advice to secure their retirement future. Unfortunately, the federal regulatory agency responsible for protecting investors—the U.S. Securities and Exchange Commission (SEC)—has failed to set rules that meet this basic standard.
If you’ve been following along for the past few years, you’ll be familiar with the ongoing conflict surrounding Regulation Best Interest (Regulation BI). It’s important for retirees to understand this rule because it could have a major impact on the investment advice you receive and ultimately, on your retirement savings.
Regulation Best Interest is the New Standard - But It’s Not Actually in Your Best Interest
As of June 30, 2020, the SEC’s new rule is officially in effect. Despite the name, however, Reg BI does not help individuals get financial advice that’s in their “best interest”. We hate to say it, but Regulation BI actually weakens investor protections and expands loopholes in the definition of fiduciary investment advice.
In the past, brokers only had to follow a “suitability” standard, meaning their product recommendations have to be suitable for your situation. Sounds vague, right? It is, and it’s open to a wide range of interpretations.
On the surface, Regulation Best Interest (BI), attempts to address the shortcomings of the suitability standard. But, instead of raising the bar over the previous standard, Reg BI merely codifies many aspects of it. Under the new rule, brokers are required to disclose potential conflicts of interest, but they still are able to receive the commissions that create those conflicts.
On top of that, Reg BI’s misleading nomenclature creates a false sense of security among investors, leading them to believe that anyone with the ‘financial advisor’ label is now required to act in their best interest. In reality, that couldn’t be farther from the truth.
In practice, many brokers receive commissions based on the financial products they sell. Thus, they have a strong incentive to recommend the ones that pay them the highest kickback, regardless of what’s best for you and your retirement plans.
So, Where Do You Find These Sales Agents Masquerading As Advisors?
The answer is, everywhere. Morgan Stanley, Wells Fargo, Charles Schwab—even financial advisors who call themselves independent advisors are often affiliated with broker-dealers such as LPL Financial, Raymond James, Ameriprise, Lincoln Financial, Commonwealth, and AXA.
People who work in these types of organizations often receive commissions on certain products and investments. This makes it difficult for you to know if your advisor is getting a cut for the products they recommend.
Before working with any financial advisor, know exactly where you stand. Ask the advisor if he or she is a registered representative and/or holds a Series 6 or Series 7 license. If the answer is “yes” to either question, you can be sure this person is in the business of sales.
How Can You Find An Advisor Who Has Your Best Interests At Heart in All Transactions?
With your future retirement savings at stake, you want to be careful in selecting a competent financial advisor. While someone in the business of selling investment, bank, or insurance products can create a retirement investment plan for you, you can never be sure they’re giving you the best advice for long-term success.
The best way to protect yourself from potentially damaging financial advice is to get educated. Start by understanding the different types of advisors and their fee structures. Unlike fee-based or commission-based advisors, fee-only advisors have taken an oath to act under fiduciary responsibility. This means they:
- Are legally required to act in your best interest.
- Do not earn commissions based on product sales.
Instead of risking your nest egg with someone who may possibly have a hidden agenda, choose an advisor you can trust. A fee-only, fiduciary advisor that is a Certified Financial Planner® is required to act in your best interests at all times, in all transactions. This virtually eliminates the chance for bias or conflict of interest, allowing you to receive more objective advice that will benefit you in the long-term.
A fiduciary advisor will take a holistic look at you and your finances to help you pinpoint, refine, and achieve your financial goals. They’ll use a proven investment process, combined with strategies customized for your personal situation.
Learn more about the Fiduciary Oath and understand how to recognize a fiduciary financial advisor, including questions to ask and red flags to look out for. Download your copy of the Fiduciary Oath Guide.