Go to the top of your retirement adviser's priority list

We naturally assume that our money managers, our financial advisers, our brokers have our best interests at heart, what's known as a "fiduciary" duty.

If not ours, whose best interests are they representing?

Well, by law, many of them weren't required to give our interests top priority - until now.

The U.S. Department of Labor issued final rules Wednesday that hold financial advisers to a fiduciary standard if they work with retirement savings. That means they must work on their clients' behalf and generally avoid conflicts of interest.

Which conflicts?

Generally, the very ways advisers are paid - specifically, through commissions and other sales-based compensation - pose conflicts. Under the new rules, many advisers will now have clients sign a "best-interest contract" that includes detailed disclosures of their compensation.

Previously, most financial advisers were held to a weaker "suitability" standard. Now, they pledge to act in the best interests of their clients when providing investment guidance on individual retirement accounts and "rollovers" from workplace plans to IRAs.

"It's a good start, in that anything that gives the consumer more transparency is good," said Terry Siman, managing director of United Capital in Philadelphia. "But consumers always thought their adviser had their best interest at heart. That's the most shocking part: 'Aren't they looking out for me?' That's not obviously the case."

How much money is at stake here?

Today, the bulk of U.S. retirement assets - more than $7 trillion - are held in IRAs, compared with $2.9 trillion in traditional pensions. In 1975, when IRAs were created, only $1 billion was held in them, while $130 billion was held in pensions.

The new rules close somewhat the distinction between brokers and registered investment advisers, said Jon Smith, cofounder of DT Investment Partners in Chadds Ford. And that's good for RIAs such as Smith, who charge a flat fee instead of commission-based products.

"Who in their right mind would want just suitability and not a fiduciary? This puts RIAs that charge a flat fee in a better position. The best way to give investment advice is when you have no product or fee that clouds your judgment," said Smith, whose firm trades mainly in low-cost exchange-traded funds and caters to clients with $50,000 to $5 million.

What's prohibited under the new rules?

The Labor Department cast a wide net. Fiduciaries manage your assets with undivided loyalty to you and other retirement-plan investors. In addition, they refrain from engaging in "prohibited transactions," which can include high-fee trades or products that lock you up for years at a time (read, private equity and annuities). On its website, www.dol.gov, the agency issued an eye-popping list that runs more than 100 pages.

When fiduciaries violate fiduciary duties or the prohibited transaction rules, they can now be held personally liable for the breach.

When will this happen?

Starting in April 2017, anyone who works at a Wall Street brokerage firm, bank or financial advisory concern and handles retirement money will be required to disclose fiduciary status and conflicts of interest. They will have until Jan. 1, 2018, to comply with the Department of Labor's other provisions and disclosures.

"This is just the beginning," said Jamie Hopkins, associate professor at the American College in Bryn Mawr. "Companies will now have to figure out how their business model, advice, products, and advisers will fit into the new rules."

Why now?

As baby boomers retire, they increasingly move money from plans in which their employer has both the incentive and the fiduciary duty to facilitate sound investment choices, to IRAs in which both good and bad investment choices are myriad and advice that is conflicted is commonplace.

Rollovers are expected to approach $2.4 trillion cumulatively from 2016 through 2020, according to the Cerulli Associates' report Retirement Markets 2015.

Who wins?

In theory, consumers do. But money managers who use ETFs and low-cost index funds might attract more clients, now that their competitors are high-commission brokerage houses that have to disclose all their product fees.

Locally, the new Labor Department rules could be a boon for large ETF managers, including the iShares unit of BlackRock Inc., Vanguard Group, and the State Street Global Advisors division of State Street Corp.

What should you ask your fiduciary?

If you're rolling over your retirement plan ask: Why is it good for me to invest with you? What fees am I charged?

Fees can come under the following guises: commissions; sales loads; sales charges; redemption fees; surrender charges; exchange fees; account fees; and purchase fees, as well as compensation included in operating expenses and other ongoing charges, such as wrap fees, mortality, and expense fees.

earvedlund@phillynews.com

215-854-2808@erinarvedlund