New fiduciary rules for investment advisors

[Dee18]

I just read about the new fiduciary rules for investment advisors, requiring them to act in the best interests of their clients.  For those of you more familiar than I with how the industry operates-- can you explain how this will work?  Taken literally, it seems someone working for Edward James should advise a client to use Vanguard funds.  Are these new rules just creating a basis for lawsuits against brokers when investments go south? 

[dantownehall]

The way I understand it, advisors under the old rules could recommend that investors use mutual funds that paid them higher commissions.

So if there were two essentially identical funds, one from Vanguard with low expenses and one from somebody else with higher expenses and a higher commission for the advisor, it was in the advisor's best interest to recommend something that was not in the investor's best interest.  I believe the new rules are intended to prevent that situation.

[ooeei]

The way I understand it, advisors under the old rules could recommend that investors use mutual funds that paid them higher commissions.

So if there were two essentially identical funds, one from Vanguard with low expenses and one from somebody else with higher expenses and a higher commission for the advisor, it was in the advisor's best interest to recommend something that was not in the investor's best interest.  I believe the new rules are intended to prevent that situation.

Yeah, I think it's something like that.  The problem is, they'll just say their fund is different because blah blah blah and that's why you should be in it even though it charges 20x the expense ratio.  As long as the funds aren't identical it's going to be hard to prove them wrong.

[GrowingTheGreen]

The way I understand it, advisors under the old rules could recommend that investors use mutual funds that paid them higher commissions.

So if there were two essentially identical funds, one from Vanguard with low expenses and one from somebody else with higher expenses and a higher commission for the advisor, it was in the advisor's best interest to recommend something that was not in the investor's best interest.  I believe the new rules are intended to prevent that situation.

Yeah, I think it's something like that.  The problem is, they'll just say their fund is different because blah blah blah and that's why you should be in it even though it charges 20x the expense ratio.  As long as the funds aren't identical it's going to be hard to prove them wrong.

I have a feeling you're right. They'll find a way around it.

[HipGnosis]

The rule-makers don't work in our best interest, what makes them think they can make anyone else do it?!?

[PhysicianOnFIRE]

It would be nice if the Rule was the death knell for front-load and back load funds with 12b-1 fees and other hidden fees, but alas, that will not be the case.

One important distinction is that the fiduciary rule will only be applied to Retirement accounts (401k, IRA, etcetera) but not to taxable brokerage accounts.

It will be interesting to see how this plays out.

[forummm]

The rule-makers don't work in our best interest, what makes them think they can make anyone else do it?!?

The rule-makers are limited in their ability to make rules by what the law says. Congress makes the law. Congress likes campaign contributions and post-Congress lucrative jobs working as lobbyists. Wall street pays well.

I think these rules will improve the situation but the industry will find a way to keep getting paid more than the value they provide.

[johnny847]

It would be nice if the Rule was the death knell for front-load and back load funds with 12b-1 fees and other hidden fees, but alas, that will not be the case.

One important distinction is that the fiduciary rule will only be applied to Retirement accounts (401k, IRA, etcetera) but not to taxable brokerage accounts.

It will be interesting to see how this plays out.

Yeah I found that distinction between retirement and taxable accounts strange.

Though in the grand scheme of things, many people don't save for retirement, and of those who do, I wouldn't be surprised if they don't have any taxable accounts.

[jeromedawg]

Haha, I heard about this from an old friend of my whose wife is a financial advisor (and owns her own business). In fact, before they were married or met, I *almost* signed up with her to be my financial advisor until my dad told me not to. Not knocking her or anything but especially after following the MMM forums, I'd rather just do things on my own (well, perhaps to an extent).

Anyway, my friend was mostly *blasting* these new rules and complaining about how "one bad apple spoils it for everyone else" (in the context of "bad" or "greedy" financial advisors). I was just thinking to myself "if you're complaining about it, that just seems a little revealing..." - I'll leave it at that. No further comments ;)

[PhysicianOnFIRE]

Haha, I heard about this from an old friend of my whose wife is a financial advisor (and owns her own business). In fact, before they were married or met, I *almost* signed up with her to be my financial advisor until my dad told me not to. Not knocking her or anything but especially after following the MMM forums, I'd rather just do things on my own (well, perhaps to an extent).

Anyway, my friend was mostly *blasting* these new rules and complaining about how "one bad apple spoils it for everyone else" (in the context of "bad" or "greedy" financial advisors). I was just thinking to myself "if you're complaining about it, that just seems a little revealing..." - I'll leave it at that. No further comments ;)

PhysicianOnFIRE likes this.

[Well Respected Man]

The Republicans in Congress don't like it:

https://www.facebook.com/GOPFinancialServices/?fref=nf

May I suggest that you subscribe to their page and tell them your opinion on the matter? They don't get many comments, or maybe they just moderate them tightly.