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New trustee ofissued by the United States on April 6 It is intended for rule. The Ministry of Labor (DOL) will change the payment method to financial advisors to provideinvestment adviceWith these rules, the advisor will have a post-retirement advisor. Your profits should be your top priority when making investment recommendations for your savings IRA and 401 (k) accounts. The new rules have the potential to save thousands of dollars each year for retired investors.
One important goal is to mitigate situations where the type and amount of payment to an advisor is an incentive to provide advice that is not in your best interests. This is the so-called "compensation for competing advice". Another important goal is to get advisors to pay "reasonable" rewards for their services. This does not necessarily mean the lowest rate, but the compensation is appropriate depending on the level of service provided.
The new rules will require potentially long and complex disclosures to investors from 2018 onwards. These disclosures describe how financial institutions behave in the best interests of you, how your advisers are paid, and potential conflicting advice and compensation.
However, you don't have to wait until 2018 to ask your advisor about compensation or potential conflicts that may occur. Understanding the basics of advisor compensation will also help you interpret any disclosures that may be required to be signed in 2018.
Basically, advisors pay in three ways, each of which can have a different impact on the advice they receive.
1. Fee or sales commission.Advisors can be paid a percentage of the amount invested in insurance or investment products. This method can tempt advisors to lead to high-fee investments and insurance policies. They may also want to close your account, which means that you buy and sell your investment frequently and generate commissions on every buy and sell. These are the situations that DOL wants to prevent with new fiduciary rules.
Commissions can range from 2% to 10% or more, so for a $ 100,000 transaction, an advisor may receive $ 2,000 to $ 10,000. In some cases, fees will be deducted from the total amount invested. However, some products are billed as "free" and all savings apply to specific investment or insurance products. In these situations, the financial institution pays the advisor a fee based on the revenue received from these products.
As a result, when asking how to pay an advisor, don't ask if your investment is being reduced by commissions. Instead, ask if your advisor earns commissions on your investment. If your adviser has received commissions, when making a nomination, ask how the adviser can put your best interests first.
Fees and sales fees will continue to be permitted under the new rules, but financial institutions will require you to sign a "best interest agreement" or legal disclosure called BIC.
Advisors may give you a contract saying they can't start working for you until you sign the BIC. You may want to skip the legitimate printed page and sign it right away, but take the time to review the document and understand the basic concepts. If you have any questions, please ask your advisor.
2. Fees based on the percentage of assets under management.The most common fee-based arrangement is to charge a percentage of the assets under the control of the advisor. 1% is a common rate, but lower or higher rates are also common. In theory, advisors should be unbiased in buying and selling investments, but there is still potential for competition in certain situations, such as:
1% may sound like a small number, but the cost can certainly be summed over time. Let's look at an example. Suppose you have a retirement investment of $ 500,000. If you pay a 1% fee, you will fork about $ 5,000 or more per year. Ten years later, you would have paid the advisor $ 50,000. If you retire for 20 years, that's certainly possible, but you'll pay $ 100,000. Do you really have to pay 1% each year?
It is unclear if an advisor claiming a percentage of assets under management will need to sign the BIC or will be able to use simpler disclosures as a so-called level fee trustee.
3. Hourly or flat rate.In this situation, you will pay the advisor for the specified project time or flat rate. Normal hourly rates range from $ 150 to $ 300, but project rates can be $ 1,000, $ 2,000, or more. These hourly or flat rates may sound high, but they can be less than 1% of your assets under management.
These fees are most comparable to what you pay a lawyer or tax accountant for property planning or other legal issues. Hourly pricing advisors often provide pricing quotes for specific projects, giving you a very good idea of how much to spend in total.
This compensation method minimizes incentives for conflicting advice, but DOL rules still require that the fees be reasonable for the services provided. In most cases, advisors who charge hourly or flat rates will not ask you to sign the BIC and will instead be considered a level fee trustee.
Conclusion: When asking about the advisor's rewards for the services you receive, you are just a good consumer and you don't have to wait for the new rules to come into effect.
Manyskilled advisors with integrity will earn commissions or charge a portion of their assets under management to provide you with good value. Your job is to shop carefully to find that person.
Being asked to sign the BIC should be a meticulous warning. Ask your adviser to explain in plain English how your interests come first. Don't be shy-it's your money and your retirement is at stake.
View all Steve Vernon articles on CBS MoneyWatch »
Steve Vernon is a large employer designing a retirement program for over 35 years. And supported the management. Consulting actuary. Currently, he is a researcher at the Stanford Longevity Center, helping to collect, direct, and disseminate research that improves the financial safety of older people. He is also the president ofRest-of-Life Communicationsand offers retirement planning workshops,Retirement Game-Changers: Strategies for a Healthy, Financially Secure and {161. } Fulfilling Long Life and Money for Life: Turn IRAs and 401s (k) into Lifetime Retirement Salaries
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