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The U.S. Department of Labor will require that the fiduciary standard apply to retirement savings accounts beginning on April 10, 2017.

The rule “treats persons who provide investment advice or recommendations for a fee or other compensation with respect to assets of a plan or IRA as fiduciaries in a wider array of advice relationships.” The rule will apply to an array of retirement savings accounts including individual retirement accounts (IRAs), SIMPLE IRAs and SEP IRAs. It will also cover health savings accounts (HSAs). Traditional taxable brokerage accounts will not be covered.

The Labor Department defines a recommendation as “a communication that, based on its content, context and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” The department adds that “the recommendation must be provided in exchange for a ‘fee or other compensation.’” Merely providing educational information is not enough.

The April 2017 start will be followed by a transition period, with the rule fully effective on January 1, 2018. Note that these dates are after President Obama’s term ends. The next president may choose to alter or rescind the rules. Lawsuits challenging the new rules could be filed as well. So, full implementation is not an absolute certainty as of press time.

What’s Changing?

The new rule is intended to prevent conflicts of interest from influencing the advice given to investors regarding their retirement accounts. Its basis is the Employee Retirement Income Security Act (ERISA), which was passed in 1974. A relevant part of ERISA is what is as known as the “prudent man rule,” which states that a financial professional must act “solely in the interest of the participants and beneficiaries . . . with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

The most prominent part of the new rule is the fiduciary standard. The fiduciary standard requires financial professionals to put the interests of the clients ahead of their own. Specifically, the new rule requires financial professionals to act in the best interest of their clients when giving advice on retirement accounts.

This is a significant departure from the current suitability standard. The Securities and Exchange Commission (SEC) says that the suitability standard simply holds that a broker has “a reasonable basis for believing that the recommendation is suitable for a client.” Though the suitability standard may sound similar, from a legal standpoint it is different. A broker could argue that a high-fee balanced fund or an expensive variable annuity is suitable for a person rolling over their IRAs. The same adviser cannot argue that those products are in the best interest of the client if lower-cost alternatives are readily available.

Companies and financial professionals will also be required to disclose fees and conflicts of interest, per the Best Interest Contract Exemption (also known as BIC or BICE). The disclosure must be in writing, though it can be listed on the firm’s website. Both firms and professionals must also, in writing, state their fiduciary status. Should investors have reason to believe that the fiduciary duties are not being met, they will have the right to seek a class-action lawsuit against the adviser and/or the firm. Complaints can still be taken to arbitration first, however.

What’s Not Changing

Commissions will continue to be allowed if a Best Interest Contract Exemption is issued. The BICE will allow for commission-based products such as indexed and variable annuities to continue being sold. As such, it will still be the responsibility of the investor to assess all costs (including surrender fees and other fees for getting out of the investment) as well as to shop around, say, for a lower-cost annuity contract. The same advice applies to life insurance policies, funds or any other proposed financial product.

The new rules do not mandate any minimum level of investment returns. As long as an adviser acts in the best interest if his or her clients, he or she cannot be held liable for poor investment returns. It’s important to realize that advisers, planners and insurance agents possess no special abilities to forecast market direction. Recommending a significant allocation to broad index stock funds can be in the best interest of the client; should the stock market go down after the recommendation was made, the loss of capital is simply due to market risk and not wrongdoing on the part of the adviser. (It would likely be a violation of the fiduciary rule if the adviser failed to adequately assess the investor’s financial situation and goals before making a recommendation.)

Misconduct or incompetence will still be risks investors have to watch out for. If a broker, adviser or other financial professional is motivated to bend or break the rules, he or she is going to do so. Fortunately, the majority of financial professionals obey the rules. This said, there are bad apples—as there are in many other industries—and many advisers who engage in misconduct are rehired, as was discussed in the April 2016 AAII Journal Briefly Noted (“Advisers With Records of Misconduct Often Rehired”).

Conduct a Thorough Background Check

Even with the new rules, thorough background checks will still be required. FINRA’s BrokerCheck (brokercheck.finra.org) lists employment history, certifications and licenses. It also, importantly, lists regulatory actions, violations, complaints, bankruptcy proceedings and misdemeanor or felony charges or convictions.

Advisers, commodity trading advisers, and others recommending futures, options on futures and currencies can be checked at the National Futures Association BASIC database. The BASIC database contains information on regulatory actions, arbitration awards, reparations and aliases.

The Securities and Exchange Commission’s (SEC) Investment Adviser Public Disclosure (IAPD) database contains information about disciplinary actions and the fees charged by brokers, advisers and firms.

Many states have information on brokers, advisers, insurance agents and firms. The North American Securities Administrators Association (NASAA) has a listing of contact information for state regulators.

Google is another useful tool. Type in the adviser’s name and see what comes up. Then do a second search with that adviser’s name plus the word “complaints.” Your goal is to seek out anything that looks odd or worrisome. Don’t only look for complaints, however; look for anything that conflicts with the profile the adviser presented himself or herself with. An example would be photos of an adviser who claims to be deeply religious at various bars and night clubs. If an adviser’s online profile differs with how they present themselves, ask questions and be prepared to take your business elsewhere.

Finally, it’s a good idea to seek a second opinion before taking the advice of any financial adviser. It’s akin to medical recommendations. If a doctor advises getting back surgery, you’d likely seek out a second opinion, wouldn’t you? So why should financial advice be any different?

Do You Need an Adviser?

Whether or not you should work with an adviser depends on you and your personal situation. A good adviser or planner can help you stay on track to achieve your goals and assist (or even manage) the complexities of your finances. About 30% of AAII members work with a financial adviser or planner. The more complicated your financial situation is, the less time you have to devote to managing your finances, or the bigger your desire to have an opinion of a professional, the more sense it makes to hire an adviser.

It is not necessary to work with one, however. If you feel comfortable managing your portfolio and your finances on your own, then keep doing so.

Those wanting to learn more about the new rule should read the Labor Department’s fact sheet. The text of the rule is also available in the Federal Register.