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Will the new fiduciary rule affect you and your IRA?

Over the past few months, many clients have asked us about the Department of Labor's "fiduciary rule," which was proposed by the Obama administration in 2016.

Although some investors are familiar with the rule, we've found that many are unaware of how it may affect them. To better understand the "fiduciary rule," let's start by discussing what a fiduciary is: A fiduciary is someone who is bound by law to act in the best interest of another party.

Now let's differentiate between two types of financial advisers:

• Fee-based investment advisers who are held to a "fiduciary" standard.

• Brokers who are paid through commissions from the investments that they sell.

The new rule primarily affects the latter.

The "fiduciary rule," which is set to go into effect on April 10th, 2017, will require brokers who provide investment advice for compensation for qualified or IRA accounts to act in their clients' best interest.

Currently, brokers who are compensated with commissions are only held to a "suitability" standard, which requires that the investments they sell merely be "suitable" for their clients. In other words, the DOL's new rule will require that all financial advisers advising on qualified accounts work in the best interest of their clients.

So how will the new rule affect you?

If you plan on purchasing an IRA through a broker who receives commissions (versus through a fee-based investment adviser,) you may be asked to sign an agreement known as the "Best Interest Contract (BIC.)"

The BIC is a contract between you and your broker's firm which states that the broker will be held to the "best interest" standard, while still allowing for commission-based investment products to be sold.

Several layers of compliance and liability have been built into the new rule and the use of the "BIC" agreement, which will increase costs for financial advisers and their firms.

While this heightened level of client care will have several benefits for the consumer and the client-financial adviser relationship, it may also have an adverse effect that hinders consumers from receiving investment advice on commission-based investments, both for new investments and for those purchased through brokers in the past.

Due to the additional costs, consumers with small account balances may find that their current broker and/or broker's firm can no longer afford to service their accounts.

As of now, it is difficult to determine exactly how the implementation of the rule will play out.

Under the new Trump administration, which will generally aim to reduce regulations across several industries, it is possible that the rule is modified or eliminated altogether.

In the meantime, if you're concerned whether or not your financial adviser is acting in your best interest, make sure to have that conversation with him or her.

Regardless of the changing regulatory landscape, it is important to work with a financial adviser that you trust to first and foremost prioritize your financial well-being.

• Jim Platania, Jr., is a financial adviser with Arlington Heights-based Platania Financial Inc., offering advisory services and securities through Cetera Advisor Networks LLC, member FINRA/SIPC.

He can be reached at (847) 870-7526 or info@plataniafinancial.com. Cetera is not affiliated with Platania Financial Inc.

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