The Department of Labor’s fiduciary rule is going into effect despite the efforts of financial firms to block it. In fact, Wall Street has found a way to profit from the new rules at the expense of vulnerable American investors.
The concept of the fiduciary rule is simple and logical. Any salesperson — broker, insurance agent, adviser — selling products for retirement account investments should agree in writing to two simple principles:
--To put the client’s interest ahead of his or her own interest.
--To fully disclose all fees, commissions, rewards (vacation trips, etc.) and any other benefits the salesperson receives from selling the product.
The industry mounted an expensive campaign to quash the fiduciary rule and keep its commissions and fees. Now many firms have started charging a flat annual fee for retirement account advice instead of charging commissions. They justify the fee by noting that now they must work harder to understand their clients’ best interests.
That flat annual fee — typically 1 percent of assets, but often far higher — amounts to significantly more than the commissions many people were paying on their IRAs, especially in accounts that have long-term investments. Until recently, most of those investors were paying only the underlying mutual fund management fees, plus a $35 annual account fee.
No longer. Almost all major brokerage firms have decided to charge a flat fee every year, on top of underlying fund fees. That can have a big impact on your portfolio returns.
So what should you do when your broker or insurance salesperson announces annual fees? Don’t be pushed into this flat-fee nonsense just because you’ve always worked with a certain broker. Yes, it’s definitely worth paying for a broker’s time, advice and attention.
But consider these alternatives:
Negotiate that annual fee. Merrill Lynch agreed to negotiate its annual 1 percent fee down to just 0.30 percent for a client who threatened to take his business elsewhere, according to a Wall Street Journal article. Don’t be afraid to ask for a lower annual fee.
Roll your IRA over into a less expensive advice situation. Fidelity, Vanguard and T. Rowe Price all offer low-cost mutual funds as well as free initial asset allocation advice.
If you sign up for a Fidelity Go account at Fidelity (minimum $5,000 investment), the company will rebalance your account at the discretion of an investment manager, informing you online after the trades have been made. The fee is 35 basis points all-in, including the underlying fund costs.
Vanguard Personal Advisor Services has a minimum $50,000 account size and costs 0.30 percent. It uses mostly low-cost Vanguard funds to customize portfolios, and it gives access to a team of Vanguard advisers.
Schwab offers its Intelligent Portfolios service, designed around your needs, with automatic rebalancing. It charges zero advisory fees and no account service fees or commissions. The minimum is $5,000, and you have access to Schwab’s investment professionals.
Consider a robo-adviser. A computerized plan has more self-discipline than you do. But the computer won’t hold your hand.
Wealthfront charges a 0.25 percent management fee, with an account minimum of $500 for its automatic advice service.
Betterment charges from 0.l25 percent to 0.50 percent with no account minimum size, and also offers premium services that include planning calls and access to financial advisers for slightly higher fees and account minimums.
It’s your money and your responsibility to take control of your investment costs. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and the author of four best-selling books. She responds to questions on her blog at TerrySavage.com.