New Rules Provide Protections for Retirement Savings

April 15, 2016

The Department of Labor has issued new rules aimed at helping those saving for retirement. The rules are intended to prevent financial advisors from steering their clients to bad investments that offer higher payments to the advisor by requiring financial advisers to act in the best interests of their clients.

Prompted by concern that many financial advisors have a sales incentive to recommend to their clients bad retirement investments with high fees and low returns because they get higher commissions or other incentives, in February 2015 President Obama directed the Department of Labor to draw up new rules that require financial advisors to act like fiduciaries. A fiduciary must provide the highest standard of care under the law.  Americans may lose as much as $17 billion every year because of bad financial advice from advisors with conflicts of interest, according to a report by the President’s Council of Economic Advisors.

The new rules require all financial professionals who offer advice related to retirement savings to provide recommendations that are in a client’s best interest. Previously, financial advisors only had to recommend suitable investments, which meant they could push more expensive products. Now advisers cannot accept compensation or payments that would create a conflict unless they have an enforceable contract agreeing to put the client’s interest first. Advisors must also disclose any conflicts they have and charge reasonable compensation.

The new rules do not solve every problem. They apply only to tax-advantaged retirement accounts like IRAs and 401(k)s and not other investments. In addition, with consent from the client, advisors can still charge a commission and engage in revenue sharing. Investors are still most likely to get the most straightforward advice from a financial advisor who receives a flat fee, rather than a commission.

The new rules go into effect in April 2017, but they won’t be fully adopted until January 2018.

For more information on the new rules, click here and here.

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What Is Undue Influence?

Saying that there has been “undue influence” is often used as a reason to contest a will or estate plan, but what does it mean?

Undue influence occurs when someone exerts pressure on an individual, causing that individual to act contrary to his or her wishes and to the benefit of the influencer or the influencer’s friends. The pressure can take the form of deception, harassment, threats, or isolation. Often the influencer separates the individual from their loved ones in order to coerce. The elderly and infirm are usually more susceptible to undue influence.

To prove a loved one was subject to undue influence in drafting an estate plan, you have to show that the loved one disposed of his or her property in a way that was unexpected under the circumstances, that he or she is susceptible to undue influence (because of illness, age, frailty, or a special relationship with the influencer), and that the person who exerted the influence had the opportunity to do so. Generally, the burden of proving undue influence is on the person asserting undue influence. However, if the alleged influencer had a fiduciary relationship with your loved one, the burden may be on the influencer to prove that there was no undue influence. People who have a fiduciary relationship can include a child, a spouse, or an agent under a power of attorney. For more information on contesting a will, go here.

When drawing up a will or estate plan, it is important to avoid even the appearance of undue influence. For example, if you are planning on leaving everything to your daughter who is also your primary caregiver, your other children may argue that your daughter took advantage of her position to influence you. To avoid the appearance of undue influence, do not involve any family members who are inheriting under your will in drafting your will. Family members should not be present when you discuss the will with your attorney or when you sign it. To be totally safe, family members shouldn’t even drive or accompany you to the attorney’s office. You can also get a formal assessment of your mental capabilities done by a medical professional before you draft estate planning documents. For more information on preventing a will contest, go here.

July 14, 2016

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