Florida Elder Law & Estate Planning Blog

Higher standard for advice on tax-advantaged retirement accounts

Financial Plan

Federal law requires a financial advisor to put the client’s best interest first when providing advice on tax-advantaged retirement accounts.  

Believe it or not, that was NOT the law until just recently. But it is today

In the past, financial advisors working with 401ks and IRAs were required only to steer clients into “suitable” investments. With that leeway, clients might sometimes be steered into “suitable” investments that were riskier and/or paid higher fees or other incentives to the advisor, rather than into less pricey, more prudent investments. According to a report from the White House Council of Economic Advisors, such conflicts of interest, “backdoor payments” and “hidden fees” have been sucking $17 billion from Americans’ retirement accounts every year. (Read report here)

Now, Americans saving for retirement will get a fairer shake. Under direction from the Obama Administration, the Department of Labor has issued a new rule requiring those advising you about tax-advantaged retirement accounts to adhere to a higher standard: a fiduciary standard. As fiduciaries, advisors will now be legally obligated to put your best interest over any other considerations. The law will go into effect in April 2017. Secretary of Labor Thomas Perez characterizes the new regulation as “…a huge win for the middle class.”

Note that the new rule does not apply to standard retail accounts. And even for retirement accounts, neither commissions or riskier investments are banned, but advisors will have to explain why they are recommending a particular investment if a less expensive or less risky one is available. 

Very important: The new rule is not at all new for “Registered Investment Advisors,” who have ALWAYS been governed by the fiduciary standard. Like physicians and lawyers, they must prioritize their clients’ interests over all other considerations. At Karp Financial Services, we are available to assist our clients with their retirement planning or other financial issues. If you do not currently have a Financial Advisor, want to establish a relationship with one, or just get a second opinion on your investment accounts or any other financial issue, feel free to contact us at 561-626-1130.