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What The New 'Fiduciary Rule' Means For Investors

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What The New 'Fiduciary Rule' Means For Investors

The U.S. Deptartment of Labor has issued new rules governing conflicts of interest in financial advice from brokers managing retirement accounts. The new rules require US securities brokers to adhere to a ‘fiduciary rule,’ which means that investment advisors must put their clients’ interests first. You may be asking yourself, “Didn’t brokers always have that obligation?” The answer would be no, they didn’t.

The new rule is aimed at clearing up that very basic relationship between brokers and their clients. In the past, brokers could place clients in more expensive investment options even if it resulted in lower returns for the customer, as long as the investment was suitable.

The government estimates the prior arrangement cost investors around $17 billion per year in reduced returns. The new rule is not set to take effect until January 2018, but some brokerage firms have already indicated they will not be able to service investors with smaller account balances.

Do You Know How Much You’re Paying For Your Investments?

If you didn’t know that your broker had a potential conflict of interest, you aren’t alone. Investing expenses are frequently overlooked by investors, who tend to focus more on historical returns. But investing expenses can have a significant impact on your returns, especially over the long term.

More importantly, investing expenses are one of the few variables affecting returns that you can actually control. You can’t control what happens to the economy, a particular company, or what markets will do. But you can control how much you spend to invest, depending on which investments you choose and where you get them.

Compare mutual funds to ETFs, for example. Most mutual funds are ‘actively’ managed, with an average management fee of 1.33% per year, according to Morningstar, an investment research firm. ETFs are mostly ‘passively’ managed index funds with management fees of around 0.1% per year, also according to Morningstar.

That 1.23% difference in management fees might not seem like much at first glance. But over a long-term investment, say 40 years, it could eat up nearly 30% of your investment in reduced returns. That’s because not only are you paying out fees every year, but also your investment is not compounding on the fees paid out.

What’s An Investor To Do?

There’s typically always some fee associated with investing, whether it’s commissions on single stock/ETF transactions or management expenses with a mutual fund. The key is to identify what expenses you’re being charged and what you get, or don’t get, in return. With ETFs, you’ll pay commissions and the ETF management fee. With mutual funds, you’ll pay the management fee, 12b-1 fees, and any ‘load’ fees. More likely than not, you’ll see that low-cost ETFs and index funds are the way to go for long-term investing. You’ll pay the lowest fees and closely match the overall return of the market you’ve invested in.

And as an individual investor, you have the option of assembling your own diversified portfolio to reflect your investing ideas and goals. You don’t need to wait for the mutual fund industry to see the light in 2018.

Disclaimer:

Most inverse ETFs “reset” daily, meaning that these securities are designed to achieve their stated objectives on a daily basis. Their performance over periods longer than one day can differ significantly from the inverse of the performance of their underlying index or benchmark during the same period of time. This effect can be magnified in volatile markets, making it possible that you could suffer significant losses even if the long-term performance of the index showed a gain. While there may be strategies that justify holding these investments longer than a day, buy-and-hold investors with an intermediate or long-term time horizon should carefully consider whether these ETFs are appropriate for their portfolio.

Before investing in an ETF, an investor should consider the investment objectives, risks, charges, and expense of the investment company carefully. The prospectus contains this and other important information about the investment company. You should read the prospectus carefully before investing. Click here to obtain a copy of the prospectus.

Posted-In: Education General Best of Benzinga

 

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