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Scout’s honor
Scout’s honor
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On Tuesday, the Obama Administration unveiled a new regulation designed to prevent the nation's 300,000-person army of financial advisers from giving conflicted advice to retirement savers. The move, which was years in the making, promises to be one of the biggest changes to the way Wall Street does business since the Dodd-Frank financial bill more than five years ago.

So what exactly is going to change? Here are five key takeaways:

1) Financial advisers will have to put your interests first

The new regulation, promulgated Wednesday by the Labor Department, imposes something known as the "fiduciary rule" across the wealth management industry, requiring all financial advisers involved in giving retirement advice to act in their customers' best interests.

Studies show that most Americans already believe financial advisers are obligated to do just that. In fact, that's never been the case. Until the rule goes into effect in January 2018, many financial pros will be bound by the much less stringent "suitability" standard, which allows them to recommend products that pay the highest sales commissions as long as the investments are broadly suitable based on factors like the client's age and risk tolerance—even if cheaper alternatives might have served the client better in the long run.

The new fiduciary rule is meant to fix that conflict of interest. By so doing, the White House Council of Economic Advisers recently estimated the new rules would save retirement investors as much as $17 billion a year.

2) Your adviser may already be a fiduciary

The new rule won't go into effect right away. In the meantime, how can you be sure your financial pro has a fiduciary obligation to you? One indication is the way you pay for his or her services. Generally speaking, advisers who charge clients either an annual fee (of, say, 1% of assets per year), a flat annual retainer, or an hourly fee were already fiduciaries and obligated to act in their clients' best interest.

By contrast, those who are paid commissions for selling particular investment products—a group that includes most advisers who sell variable and fixed-index annuities and so-called "load" mutual funds—have been permitted to act more like salespeople and merely have to live up to the suitability standard.

Many of the large, brand-name Wall Street firms have been urging their advisers to take on more fee-based clients, partly to avoid conflicts of interest and partly because fees provide a steadier and sometimes larger stream of revenue for the firms. In other words, the industry's big players were already moving in the direction of the new rule. That said, many financial advisers at those firms (as well as at smaller ones) can work in either capacity, depending on the client.

Some ambiguity will persist at least until the rule goes into effect. So if you have doubts, consider following the advice of fee-only financial planner Harold Evensky, who suggests asking your adviser to sign this plain-English document attesting to his or her fiduciary responsibility. If they balk at doing so, consider another adviser.

3) You'll still need to be very careful about your IRA rollover

Although the new rule is expected to reverberate throughout the wealth management industry, it technically applies only to retirement accounts like 401(k)s and IRAs, over which the Labor Department can claim legal jurisdiction.

The Labor Department's biggest focus is on IRA rollovers. That's because many Americans do the bulk of their retirement saving in a 401(k) sponsored by their employer. As long as you remain in your job, that money is tied to your employer's plan. But once you leave a job or retire, you have to decide what to do with the accumulated savings—a nest egg that may amount to hundreds of thousands of dollars.

That is the point where a financial adviser tends to step in, often recommending that the money be "rolled over" from the 401(k) to an IRA, which allows the adviser to take custody of the money and give advice about how it's invested. There is nothing inherently wrong with that. The problem is that too many advisers have been putting their client's rollover money into products like variable annuities and active mutual funds that offer fat upfront commissions but are not the best long-term options.

Unfortunately, it's not clear how dramatically the new rules will change the kinds of IRA rollover pitches that investors see. An early version of the Labor Departments rule would have made it difficult for advisers to earn commissions on rollovers altogether. In the end, however, vociferous industry opposition led to a softer stance. The new rules don't prohibit any particular products or an adviser's ability to earn commissions. But advisers will have to either show they aren't earning extra compensation as a result of the rollover or comply with complex new rules designed to make their conflicts and compensation clear to investors.

Just how onerous these new disclosure requirements will turn out to be when applied in the real world, and whether they will actually curtail the sale of unnecessarily expensive investments, is not yet clear.

4) Your adviser may fire you...

Investors with relatively small accounts may be hit with an unintended consequence of the new rule. The reason is that advisers who charged up-front commissions have long catered to less wealthy clients. (Think $50,000 to $100,000 in savings, instead of, say, $250,000.) That's led Wall Street trade groups to argue that the tougher ethical standard would actually hurt small investors by prompting firms to drop less wealthy customers, whom it would no longer be profitable to serve.

Some of that is certainly lobbyist bluster. Groups that actually represent small investors, like the Consumer Federation of America, have tended to favor the fiduciary standard. And recent reports from the industry's trade press suggest that many firms are actually doing the opposite, dropping minimums on certain types of accounts in an effort to keep customers on board.

Still it's possible that some advisers will be forced to change their business models, in some cases by jettisoning less wealthy customers.

5) …but there are good alternatives.

If that happens to you, don't despair. Even as new regulations close some avenues for financial advice, technology has opened others. A slew of new companies known as robo-advisers help investors with as little as a few hundred dollars get customized portfolios of stock and bond funds. Meanwhile, mutual fund giant Vanguard offers to connect middle-class investors with financial advisers over phone and email. The minimum account size is $50,000.