Who’s got your back?

When someone gives you advice about retirement money, who exactly are they working for?

It’s surprisingly complicated. If you have a company retirement plan, the people who run it – your employer, various firms that provide investments and handle the money, and advice providers like GuidedChoice – are already “fiduciaries.” This means we’re legally required to act in your financial best interest. Not in the interest of our own paychecks, shareholders, or anyone else.

As you’d expect, your right to unbiased treatment and good advice is governed by a lot of regulation. The whole thing is overseen by the Department of Labor (DOL), which is in charge of retirement-related matters. Or at least those involving employers; more on that later.

So far, so good. Now the DOL has raised the bar by extending this best-interest requirement to cover IRAs as well. This means that anyone who recommends investments or investment policies for your IRA, or even recommends a particular IRA provider, will have to do so entirely in your best interest.

This is a big deal, because today some kinds of financial professionals (“broker-dealers”) actually get paid different amounts depending on the funds you buy. If that sounds like a conflict of interest, it is. If it seems like it could cost you money, it can: the feds estimate that Americans spend $17 billion per year on conflicted fees and commissions that will be eliminated.

The details are pretty complex. Some won’t be sorted out for years, until after the lawsuits are settled. There are also quite a few exceptions. But the takeaway is that the “fiduciary standard” now covers more of the financial landscape than it used to – though still not all of it.

If you just said “whaaa?” you’re not alone. About half of those surveyed in one study believed that everyone involved in investing your money already had this responsibility. Not so! While a registered investment advisor does, broker-dealers and firms that sell annuities will stick with the older, lower standard as long as the money is in a regular brokerage account, not a tax-deferred plan like an IRA.

That’s because those accounts are overseen by a different agency, the Securities and Exchange Commission (SEC), which has different rules. We think it’s a little like when the bad guys in a movie race across the state line, and the trooper pursuing them stops his car, gets out, and throws his hat on the road in frustration.

The good news is that the SEC is mulling it’s own fiduciary standard. The DOL’s action is likely to add pressure. There’s hope that a future rule will close the gap, creating near-uniform protections for investors, wherever they put their money. Until then, as we’ve said before, be careful whenever you’re considering financial advice.

Image courtesy Edgars Bērziņš via Flickr Creative Commons