by Al Rettig

You've probably seen the words "fiduciary rule" in the news and may have wondered what all the fuss is about. Answer: it's about us--America's retirees and future retirees--and the investment advice we're counting on to keep our nest eggs safe and growing.

A fiduciary is a person who is bound to act for another's benefit. Sounds simple, but in the world of finance it can be complicated. Those of us with retirement savings in IRAs, 403(b)s, 401(k)s and other tax-sheltered accounts have usually selected these investments on the advice of someone. Maybe it was a stockbroker at one of the well known brokerage houses; maybe it was a banker; or maybe it was an independent financial advisor. We assume that all these people are acting in our interest when they recommend an investment. But are they?

Again, it's complicated. In the money management world true fiduciaries are legally pledged to act in your best interest and can be held to a very high standard in this regard. For example, if they recommend investments that are unsuitable for you, or that carry very high sales charges compared to similar investments, you have the right to take them to task, and even take them to court. On the other hand, money managers who are not fiduciaries are only pledged to recommend investments that are "roughly suitable" for you. They are free to steer you to funds that will pay them high commissions or that might not be the absolute best for you. And they're not required to consider the widest choice of investment options in making their recommendations. In other words, their loyalties can be conflicted. Yes, of course they want happy customers, but they often have their own financial interest in mind as well when they suggest an investment.

After eight years of development, a new "Fiduciary Duty Rule," was originally set to take effect on April 10. To be administered by the Labor Department, the rule says that anyone who sells tax-deferred retirement accounts must meet the standard of a fiduciary, recommending investments that are in solely in the client's best interest. Predictably, everyone from Wall Street to the banks to the Chamber of Commerce hates this rule and has lobbied hard to scuttle it. They claim the rule would be unduly burdensome on them and would cost too much to implement. The current administration seems to agree, and a February executive order demanded the rule be completely reviewed before implementation. But such a review has proven difficult, in part because the original nominee for Secretary of Labor withdrew from consideration and it took until late April for a new candidate, Alexander Acosta, to win Senate approval. Many top positions at the Labor Department remain vacant. Nevertheless, on May 24 Acosta announced that the rule will take effect on June 9. He said that after careful review, the Labor Department has “found no principled legal basis [for further delay] while we seek public input,” and that “respect for the rule of law leads us to the conclusion that this date cannot be postponed.”

However, Acosta also said that even though the rule will take effect in early June it will not be enforced until the new year, and that public comments will continue to be reviewed as the executive order demanded. This means that while the rule will technically be in force as of June 9, its future is still uncertain.

So where does that leave us? It leaves us where we've always been: deciding whether to insist that our financial advisors adhere to fiduciary standards is completely up to us. With or without a new rule we're free to choose the people who manage our money. If you don't know whether your banker, broker or advisor operates as a fiduciary, just ask. They're required to tell you. Typically, bankers and representatives at your neighborhood stock brokerage branch are not fiduciaries, while independent financial advisors often are. That's because independent advisors are generally compensated by fees you pay directly to them, plus they're not under pressure to sell investments in which their company has a direct interest. And because independent advisors are usually fee-based, they're much more likely to work with you closely to choose investments for your 401(k) and 403(b) accounts, even though they typically won't receive commissions from them.

Does this mean that bankers and brokers are "bad" and that independent advisors are "good?" No, not at all. Many investment managers who are not fiduciaries do a fine job for their clients, recommending perfectly appropriate investments. But understanding the fiduciary relationship--or the absence of it--is a crucial part of financial literacy. It is important to know precisely where your interests stand vis a vis your advisor's interests, and to ask lots of questions if you notice that you're paying very high fees for your funds or that your advisor is recommending frequent changes to your portfolio. These can be red flags. No matter who manages our money the key thing to remember is that we are buying, they are selling, and we must conduct ourselves accordingly.