The requirement to have financial advisors act as fiduciaries open the doors to a retirement ripoff.
By now, you have read about the Department of Labor’s regulations forcing any professional handling your retirement funds to act as a fiduciary. When a financial professional is held to a fiduciary standard, it means he must act in your best interest.
DOL found this necessary. Their data showed an excessive amount of inappropriate, overpriced and high commissioned investments and insurance products being sold to retirees. The new fiduciary rule requires your financial advisor and insurance agent to act in your best interest when handling your retirement accounts.
Since this rule is not effective until 2018, the government has opened the door for a last-ditch effort by every huckster and fraudster in town to commit retirement ripoff.
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Note that 99% of retirement advisers and insurance agents are honest and well-meaning people. However, many of their employing firm's senior management are not. (For evidence, just Google the name of any securities firm or insurance company followed by the word "fines").
For the next two years, financial “advisors” and insurance agents may continue to peddle overpriced and high commission products with the government’s blessing. Many of these agents and advisors don't even know that they sell crap.
Let me provide an example.
My Introduction to Crap Investments
I first entered the securities business in the 1980s. One of the direct participation programs offered by my employing investment firm was an investment in new homes. Investors putting money in this offering would have a partial interest in 1000 homes that would initially be rented and eventually sold.
The prospectus was 70-some pages and I am confident that few if any investors read it as did an equally small number of investment brokers. Much to your shock, investment brokers often sell investments they do not understand and are not qualified to sell.
Being a CPA (inactive now), I had the ability to decipher a prospectus and the accompanying financial statements. I calculated that these homes needed to appreciate by 7% annually just for the investors to breakeven. In other words, the commissions and fees were so high that the investment had to perform spectacularly just for the investors to get their money back.
Selling this type of poorly structured investment is totally legal today as it was 30 years ago. The government does not regulate the composition of investment or insurance products as to their viability. This results in a lot of crap investments and insurance products being sold to the public.
Fiduciary Rule Leaves Some Assets Open to Retirement Ripoff
Even if the fiduciary rule were effective today, it only impacts retirement account such as IRAs and 401(k)s. It’s still open season for ripoff artists to get it your other funds.
It appears that the DOL folks don’t realize that a dollar in your IRA is actually worth less than an invested dollar outside of your IRA. The dollar in your IRA is only worth $.70 to you after tax.
So why have the folks in the government decided that protection of your retirement money has greater importance than your other money?
People in government often don’t understand that their regulations may not jive with reality. Additionally, regulators are often the pawns of the industry they regulate.
For example, maybe most of your retirement money is not in a 401(k) or IRA. Possibly, you have invested in stocks, bonds mutual funds and real estate outside of any tax- sheltered plan. The DOL rule does not require investment and insurance professionals to act as fiduciaries when selling you investments or insurance for these non-retirement account funds.
Seems silly, doesn’t it?
Only Requirement is that Investment Meet Suitability Rule
Your financial professional is permitted to recommend and sell you the highest commissioned most poorly structured financial product so long as it meets the "suitability rule." The term "suitable" has no meaning until you file a complaint with FINRA.
FINRA, the organization that is charged to protect you when investing, offers this explanation of the suitability rule on their web site:
“FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer.
This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.
The rule states that the customer’s investment profile “includes, but is not limited to, the customer’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs [and] risk tolerance,” among other information. A broker’s “recommendation,” which is based on the facts and circumstances of a particular case, is the triggering event for application of the rule.
Brokers must have a firm understanding of both the product and the customer, according to Rule 2111. The lack of such an understanding itself violates the suitability rule.”
I find it comical that FINRA calls such ambiguity a “rule.” This is nothing more than a guideline open to interpretation. It is my opinion that this ambiguity is intentional as it permits FINRA a much wider berth in filing actions against securities firms and registered representatives (individuals licensed to sell investments).
This latitude in bringing more sanctions allows FINRA to justify itself by handling a lot of suitability cases.
By the way, FINRA is not a government organization. The federal government (through the SEC) has delegated the securities industry to regulate itself. That regulatory organization is FINRA. Personally, I cannot think of anything more ludicrous than having an industry regulate itself. Can you say "retirement ripoff?"
Not until you file a formal complaint about some investment and the actions of your financial advisor, 
does anyone consider whether an investment meets the "suitability rule.” Supposedly, the financial advisors employing firm should do this. However, this oversight often fails. One of the most frequent fines assessed against investment firms is for “failure to supervise” their representatives.
Once you file a formal complaint with FINRA, there is a hearing. At that hearing, the FINRA panel considers facts about you (your age, level of knowledge, acceptance of risk, income, net worth, etc.) The panel then also considers aspects of the investment (liquidity, risk, volatility, etc.) Panel members do not look at the soundness of the investment or its potentially onerous fee structure.
FINRA makes a decision about suitability by comparing your situation and the investment profile. What is determined unsuitable for you could easily be determined as suitable for another investor who matches your profile exactly except for one factor, such as level of investment knowledge.
Therefore, application of the suitability rule is a judgment which is only determined when the investor has decided he has been wronged and file a complaint.
So until 2018, much of the investment industry will continue to operate under the requirement of selling only what qualifies under the suitability rule. After 2018, the industry can continue using that same guideline for any non-retirement-plan investment.
As to the sale of annuities that do not qualify as securities, the "suitability rule" developed by the National Association of Insurance Commissioners says (I have added the underlining):
"requires insurers to establish a supervisory system that is “reasonably designed” to achieve compliance with its requirements, including procedures for reviewing recommendations before issuing an annuity to ensure there is a “reasonable basis” to determine that a recommendation is suitable, as well as “reasonable procedures” for detecting recommendations that are not suitable."
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