Last year a new law was written that, for the first time, required anyone advising 401k and IRA participants to act as a fiduciary with the obligation to work in their clients' best interests, according to U.S. News.
Non-fiduciary investment advisors can recommend products with high commissions and charge unnecessary fees which can lose a considerable amount of money over time.
Recent research by Personal Capital has shown that more than 20 percent of investors do not understand how much money they are paying in fees while 10 percent are unsure if they pay fees at all. In fact, a recent Council of Economic Advisers to President Obama found that the impact to IRA investors alone was one percent of their return each year – a figure totaling $17 billion. This loss can lead to five fewer years of funds being available during retirement.
Typical fiduciaries will work under a fee-only payment structure that avoids commissions entirely so that they can provide transparency to their clients in writing without any surprises. Any investment products recommended will carry minimum expenses to manage, and there will be an explanation of the expected risks and performance in the future.
Removing the incentive to promote commission-heavy products means that fiduciaries are under less pressure to sell and they often meet with clients at least twice before making any recommendations, according to research at the University of Georgia. With this approach, they can look at their clients' finances more holistically to learn about goals and life plans to develop the right strategy.
