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How your financial adviser may be ripping you off

Lee Brodie

You might not know this, but under current rules, it's perfectly legal for your financial adviser to steer you into retirement investments that might make more money for them than you.

Currently, unscrupulous professionals can make recommendations based on the amount of commission they receive, rather than what’s in your best interests. As long as an investment is deemed “suitable” for investors, it’s fair. “They have to take your appetite for risk and your personal goals into account. But they can recommend something that’s high cost,” explained Tara Siegel Bernard, finance reporter at The New York Times.

Therefore, brokers could recommend a mutual fund that imposes a high upfront fee instead of a similar lower-cost alternative, leaving you with less money to invest. However, new rules under consideration by the Labor Department could soon transform the landscape by requiring brokers who offer retirement advice to enter into "best interest" contracts with investors.

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“All brokers dealing with your retirement will have to act as fiduciaries,” Siegel Bernard said, meaning they will have to put the investor’s interest first, all the time. Individual investors who feel wronged could take action against their broker through a private right of action, such as arbitration.

The Internal Revenue Service would also be able to impose an excise tax on transactions that were based on conflicted advice. Currently the changes are under review with the Labor Department entertaining public comments from the industry as well as consumer advocates.

“Once the comments are collected, there will be a public hearing. Then, the Department of Labor can tweak the rule and then put it into effect,” Siegel Bernard said. Until then, if you’re allocating money for retirement, let the buyer beware.

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