SCOTTSDALE, AZ – 11 Aug, 2016 – It’s surprising, but true – some financial professionals, like securities brokers and insurance agents, were only recently required to act in the best interest of their clients.
The reason has to do with how the financial services industry operates. Traditionally, securities brokers and insurance agents were required to act under what’s known as a “standard of suitability,” meaning that as long as a particular investment or insurance product was right for the client it didn’t necessarily need to be the best choice from the options available.
It’s something of which the public was generally unaware, compounded by confusion over the various roles and requirements of the different types of financial professionals, and the legal responsibilities of each.
Yet it had the potential to impact an individual’s or couple’s quality of life in retirement. For instance, if a financial representative had two similar insurance products or investments, but each with different fees, the consumer might find themselves in the more expensive product.
Consumer information provider NerdWallet analyzed a variety of savings scenarios in a recent blog post, and in one case found that paying just 1 percent more in investment fees could cost a person more than $590,000 in returns over 40 years.
It’s what popular investment guru and Vanguard founder John Bogle refers to as the “tyranny of compounding fees.” Just like the accelerating effect that compounding interest has on the growth of retirement savings, the same thing can happen—only in the opposite direction—with insurance or investment fees. According to an April 6 press release put out by the Office of the Press Secretary, The White House Council of Economic Advisers estimates the higher costs and lower resulting returns hit American workers to the tune of $17 billion a year.
The Department of Labor, driven by a number of high-profile lawsuits, as well as a greater sense of urgency for effective retirement savings strategies, stepped in, resulting in the “Conflict of Interest Final Rule” from the Department of Labor released in April, also known as the DOL’s fiduciary rule.
Merriam-Webster’s dictionary defines fiduciary as relating to or involving trust (such as the trust between a customer and a professional). For the purposes of retirement advice, the DOL’s rule is meant to protect consumers by requiring financial professionals who provide retirement investment advice to consumers who hold funds in an ERISA product, such as a 401k or IRA, abide by a fiduciary standard—putting their clients’ best interest before their own profits.
The question of how, exactly, the rule will be enforced, coupled with a lack of general awareness of the term “fiduciary,” means it’s implementation is anything but clear. One thing that is clear, however, is strategic advantage and greater importance of hiring a financial professional who understands their responsibilities and will act in a fiduciary capacity.
“Before talking about the market or even thinking of opening an account, the financial professional and client should get organized,” says Bill Wilkinson, CFP, ChFC, CLU, CASL, AIF, president of Scottsdale, Arizona-based 360 Wealth Management, Inc. and an Investment Adviser Representative and insurance professional. “The organizational strategies I use with my clients include building a balance sheet, developing an estate planning flowchart, calculating a cash-flow statement out to the age of 100. When we do this, and show them a true view of their financial situation, it doesn’t take long for their eyes to widen.”
While many financial professionals focus on large expenses often felt in retirement, they don’t necessarily go as “micro” as they should, in my opinion, and look to such things as hairdresser bills, cellphone statements and fluctuating gas prices. When they do, hypothetically, an initial estimation of $50,000 in annual expanse quickly becomes larger.
“If someone is going to call themselves a holistic wealth manager, they have to be capable of finding a solution that addresses any financial need—whether it’s real estate, debt liabilities, insurance, investments or whatever—they’d better have that knowledge,” Wilkinson concludes. “A fiduciary is not something you just are, it’s what you do, and the new rule means the industry is on track to get the public what it really deserves from financial services.”
For more information, please visit http://www.360wealthmanagement.com
Company Name: 360 Wealth Management, Inc.
Contact Person: William H. Wilkinson III, CFP, ChFC, CLU, CASL, AIF, Preside
Country: United States