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The introduction of President Donald Trump’s administration has small business owners wondering how things like his corporate tax, regulation, and investment policies could affect their businesses.
But in Trump’s recent move to review the Dodd-Frank Act rules—put in place by the Obama administration in response to the 2008 financial crisis—there’s even more up in the air for U.S. consumers and small business owners alike.
If the Trump administration moves forward and kills the fiduciary rule, what will it mean for your small business? Here are the facts you need to know.
You might not even have known what the fiduciary rule was before hearing that Trump has plans to kill it. Now that the rule is in review—and increasingly getting air time in national news—let’s review the facts.
As an overview, the fiduciary rule is a Department of Labor ruling that was scheduled to take effect on April 10th, 2017—until President Trump issued a memorandum that stalls its start date by 180 days while it undergoes review.
The fiduciary rule would require all financial professionals (advisors, brokers, and so on) to act in the best interest of their clients—meaning that any conflict of interests, fees, and commissions earned on the behalf of the financial advisor must be fully disclosed to the client.
The rule came as a response to the need to tighten industry standards that incentivize brokers to push high-fee investment and retirement products on clients—adding to their own profits while hurting their clients. In fact, it’s been estimated that this conflict of interest costs American investors $17 billion each year.
Under the fiduciary rule, any financial advisor working on commission for certain investment products must provide clients with a disclosure agreement whenever a conflict of interest could exist—such as the advisor receiving more money if they successfully push a certain product on a client.
Now that you know the basics to the fiduciary rule, your next question is logically, “How does the fiduciary rule affect me and my small business?”
The fiduciary rule comes into play when you set up a 401(k) or retirement plan for your small business.
Small businesses have notoriously expensive and cumbersome retirement plans for both their owners and employees. That’s in part due to the fact that smaller retirement plans are costlier per person to set up and employees end up paying fees 5 or 6 times more than what their peers at large companies have to pay.
But it’s also because some small businesses have been the target of ill-intentioned financial advisors and brokers working on commission. With no time on their hands or little experience setting up a retirement plan in the past, small business owners end up paying a lot more in fees for investment accounts—up to 3 or 4 percent of their investments.
That’s where the fiduciary rule comes into play with your business. Small business owners, in theory, stand to benefit from the fiduciary rule as it protects them from the conflict of interest that encourages brokers and advisors to push high-fee products on them.
If the rule were effective, smaller businesses can’t be duped into high-cost 401(k)s that drain their (and their employees’) retirement accounts.
The fiduciary rule and general financial advising industry overhaul was welcomed by many industry groups—such as the CFP Board, the Financial Planning Association, and the National Association of Personal Financial Advisors—as a move toward transparency in the market and financial protection for all U.S. investors.
However, the stall on the fiduciary rule under the Trump presidency comes from increasing opposition from brokers and financial planners. These financial advisors would rather be held to a “suitability” standard instead of the stricter standards of a fiduciary.
They believe the fiduciary rule would result in a loss of commissions and added costs of compliance—in effect, making the low- to middle-income investing market a lot less profitable for financial advisors. The argument to review and revise the fiduciary rule stems from the idea that, with financial advisors leaving the low- to middle-income investing market, investors will have less advice and fewer resources to make informed choices about their retirement funds.
In the case that there’s no new legal protection against non-transparent advice and conflicts of interest, business owners and investors need to stay vigilant when working with financial professionals and advisors.
If you aren’t looking closely at the financial advice you’re getting on your investment accounts, you run the risk of paying way more than you need to in fees.
Be sure to ask questions that will reveal if financial advisors are working in your best interest. Ask flat out if the advisor is a fiduciary (and legally obliged to serve your interests first), how exactly they are paid by selling you products, and what fees you’ll have to pay with their accounts. Honest answers will shed light on how the advisor is prioritizing your financial interests over theirs.
While it’s unclear whether the rule will really be dismantled, and what will happen if it is, one thing is for certain:
As a small business owner, you should always be on the lookout for unnecessarily steep fees and costs that hurt your business and your employees. Now, more than ever, it’s time to keep your financial wits about you!