Contractual obligation: the fiduciary rule will not offer protection outside retirement accounts © Getty
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Although less dramatic than first feared, the Department of Labor’s fiduciary rule is expected to result in big changes to investors’ individual retirement accounts (IRAs) in areas such as fees, product options and access to professional advice.

Unveiled in April, the rule requires financial advisers to act in clients’ best interests when handling their retirement accounts, putting investors in a stronger position if advisers misbehave. “The DoL rule will have a [positive] impact for investors who have been maybe taken advantage of by high-commission products,” says Scott Hanson, co-chief executive at Hanson McClain Advisors, based in Sacramento, California.

Mr Hanson, whose firm manages more than $2bn in assets, warns the rule will not eliminate unscrupulous advisers or offer protection outside retirement accounts as advisers could still put clients in “garbage product” non-retirement accounts without retribution.

But, once the rule takes full effect in January 2018, IRA investors will receive more paperwork from advisers, specifically when they may have more room to act outside clients’ best interests. One example of this is the best interest contract exemption (BICE), which can allow advisers to work on a commission rather than a fee basis. Other instances when BICE contracts might apply include when advisers recommend rolling a lower-cost workplace retirement plan into a higher-cost IRA account, or switching from a commission-based IRA account to a fee-based one.

Advisers will have to justify and document recommendations in the BICE each time they occur for each investor, says Tom Corra, chief operating officer for Fidelity Clearing and Custody: “It’s going to be incumbent on the [adviser] to determine what characteristics they’re going to utilise to justify the rollover, in this case, as in the best interest of the client.”

The fiduciary rule is likely to push more IRA accounts overseen by advisers on to a level fee basis, but that is not a fail-safe, Mr Corra says. The adviser still must make the case that any move is best for the client.

Although the industry had concerns that some products would be barred from IRA accounts, there is a long list of acceptable products, including variable and fixed annuities and liquid alternative mutual funds. But Fidelity research predicts the rule will push more dollars into cheap passive products within IRA accounts, which, in turn, will lead to downward pressure on fees. This cost-first approach will further hurt products that use active management, where investors pay a premium to managers who choose securities expected to beat, not track, a selected benchmark.

In 2015 alone, active mutual funds bled $218.3bn while passive mutual funds added $194.5bn in net new money, according to financial data provider Morningstar. Advisers who employ actively managed products are going to have a hard time justifying why they continue to use them, Mr Hanson says. He also thinks high-priced annuities and some real estate investment trusts are likely to be all but eliminated from IRAs.

High-priced annuities in 401(k) defined contribution plans will also be hard to justify, says Paul Moffat, president of Las Vegas-based Arista Wealth Management.

“There are a lot of people in this [retirement] space who will need to be looking in the mirror and evaluating if they’re doing the right thing,” Mr Moffat says.

Such moves will extend beyond a preference for passive products, says Ginny Stanley, principal at REDW Stanley Financial Advisors, based in Albuquerque.

The fiduciary rule also puts pressure on advisers to obtain the lowest-cost share class within each fund, she says. “I do think it is going to have an effect on fees, probably in the smaller account area,” Ms Stanley says.

And the fiduciary rule could make finding a financial adviser more difficult, says Tom Owens, principal at Garde Capital in Seattle. Some advisers — faced with the decision to justify their commission-based model or stop working with less-valuable IRA accounts — may raise their account minimum threshold to essentially eliminate smaller accounts entirely.

But Mr Owens says being rejected by commission-based advisers might be a good thing because they may not have the clients’ best interest at heart. He adds that to be truly on “the same side of the table as the client” advisers will have to put the interests of others ahead of their own.

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