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Fallout from Brexit Highlights Importance of Proposed DOL Fiduciary Rule

Britain’s vote to leave the European Union has caused unprecedented uncertainty and volatility in stock markets around the world. One result is the influx of calls that financial advisors are receiving from panicked investors who are seeing the value of their 401(k)s and other retirement accounts tumble as a result of Brexit.

As they provide assistance, it will be interesting to see how they advise clients as a new law governing them putting their clients’ best interests above their ability to rake in more commissions and fees takes shape. Referred to as the fiduciary rule, it is a proposal from the U.S. Department of Labor that is attended to protect investors from unscrupulous advisors more concerned about commissions than their clients’ financial well-being.

 · Fiduciary rule defined

In 2010, the DOL spelled out in a press release the generalities of the proposed fiduciary rule. In the release, it was explained that the proposed rule was meant to update the definition of “fiduciary” to more broadly define the term as a person who provides investment advice to plans for a fee or other compensation.

The proposed rule defines when a person providing investment advice becomes a fiduciary under the Employee Retirement Income Security Act. The proposed amendment would update that definition to take into account changes in the expectations of plan officials and participants who receive advice, as well as the practices of investment advice providers, according to a release from the DOL.

 · Best interests

The proposed fiduciary rule has caused much angst among financial advisors who say that the DOL is overstepping its bounds in calling for them to abide by specific standards in providing financial advice to clients.

Proponents of the proposed rule believe some advisors push products on clients who may not need them, all because the advisors wanted to collect more in commissions and fees. To stymie this practice, which has been estimated to have cost investors more than $17 billion annually in wasted costs, calls were made for government intervention.

The DOL boasts being mindful of these criticisms and attempting to revamp the rule. The latest version is intended to adequately protect consumers and level the playing field for advisers who do right by their clients.

Furthermore, the DOL says its new proposed rule minimizes compliance burdens. Industry players beg to differ.

As an investor, there are some things that you can do to protect yourself from unscrupulous advisors.

 · Disdain

Many in the financial advisory space have been insulted by proponents of the rule. They have said that it is not a matter of them wishing to make money on the unsophisticated investors by taking advantage of their ignorance of the best financial products for them. Instead, financial advisors have remained steadfast in their support of guidelines to make sure those in their industry put the best interests of clients ahead of their own financial gains. No matter, observers say many financial advisors seem hell bent on throwing as many monkey wrenches as they can in the process of making sure that happens.

 · What should an investor do?

Their homework.
Before you approach a financial advisor about how you should play the market in light of Brexit, take the time to do some research on your own. This is especially the case for investors who work with broker dealers because this group of advisors is thought to have their operations impacted the most by the proposed rule.

We could see mutual fund companies change their product offerings to investments that advisers and broker-dealers will use for retirement accounts such as IRAs.
One example is their possible use of passive investments, which tend to keep investment fees as low as possible.

So, investors should consider mutual funds that are not heavily weighted with sales loads and high fund expenses.

Advisers are reportedly reaching out to clients in the wake of Brexit, according to Investment News. Investors should as ask if their portfolios are globally diversified, which should buffer them against downturns in the markets like this.

Beware of advisers who advise you to trade during these volatile times. Many advisers are telling clients that this volatility is short-term, so don’t have a knee-jerk reaction. This is wise for the long-term investor.

Lastly, take a look at the proposed DOL rule. There you’ll find what proponents are trying to protect you from, which should give you an idea of what you should ask your advisor.

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