You have probably seen, heard or read about something called the DOL Fiduciary Standard in recent months. You might have thought, “What does that have to do with the price of tea in China?” or, “What is the DOL and/or what is a fiduciary?” All logical responses because unless you are in the financial planning or investment business you probably haven’t given it a second thought. Here is a brief synopsis of how it will affect you.

First, the DOL is the Department of Labor. They are responsible for enforcing employment law in our country and, in essence, looking after the rights and welfare of employees. A fiduciary is someone who is obligated to act in your best interests, such as a financial advisor. You might ask, “Well, aren’t financial advisors supposed to act in the best interests of their clients?” The answer is, “yes”. However, prior to the passing of the DOL rule financial advisors were only obligated to recommend solutions that were “suitable”. In other words, the product had to be a fit with your investment time horizon, experience and risk tolerance.

That left the notion of “your best interest” up for interpretation. From the government’s perspective that vagueness led to a few “bad apples” taking advantage of retirement investors by putting their hard-earned retirement savings into investments vehicles that were overly expensive, among other things. These overpriced investments may have been “suitable” from the standpoint of fitting the consumer’s risk tolerance and investment time horizon but they were not in the “best interest of the client from a fiduciary perspective.

The outrageous fees diminished the yield on the retirement funds and lessened the chance the investor would reach their retirement goal any time soon. For example, an investment that boasted a yield of 7% after paying 4% in annual fees the yield is 3%. That’s a big “haircut”!

Financial Advisors who operate on a “fee basis” don’t charge commissions. They will typically invest your money and charge a smaller annual “management fee”. These fees typically range from .75% to 2.0%. By pricing the investment in this manner it effectively puts the advisor and the client “on the same side of the table” since the advisor gets paid for an increase in the portfolio and also suffers, just like the client, when the investment value decreases.

One-time commissions can be as high as 8%. All of which raises the question, “If an advisor has two options, one that pays him/her 8% or one that pays 1-2% per year, which one is in the best interest of the client and which is in the best interest of the financial advisor?”

The goal of the DOL is to eliminate that conflict of interest and require that a financial advisor act in a fiduciary capacity when dealing with a client’s retirement assets. This means that the fee-based option is almost always going to be in the best interest of the client. If the advisor wants to recommend a commission-based product, the client and the advisor have to sign a “BIC” agreement (Best Interest Contract). This is a contract that states that the client acknowledges that they are buying a product that has a commission. All fees are disclosed and it lists steps the advisor will take to mitigate any potential conflicts of interest.

While the DOL has the best interest of the public in mind with this regulation, it does “punish” those advisors who are already operating in a transparent manner and are, in essence, acting in an otherwise “fiduciary” capacity. The benefit for the consumer is that it will force more of the “bad apples” out of the industry and force the financial product manufacturers to develop products that are fairly priced and easier to understand.

As with any major financial decision, do your homework. Check out the financial advisor that you are thinking of working with. Ask them if they offer fee-based options. Look for advisors who have the CFP® (CERTIFIED FINANCIAL PLANNER) designation. Always make sure the advisor offers more than one option to your financial need.