More than four years in the making, the new rules issued Wednesday by the Labor Department – referred to as the “Conflict of Interest Final Rule” – will require financial advisers to be held to the so-called “fiduciary” standard.
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The Obama administration says it’ll protect you from advisers who steer you to investments that mean big fees for them. The new requirement should significantly improve disclosure, reduce conflicts of interest, and force brokers and advisers to explain to you why they are recommending particular products when better and cheaper options are available.
The rule, which will be phased in starting next year and take effect in full in 2018, could change the investment options offered to retirees. Under the rule, financial firms advising workers moving money out of company 401(k) plans into Individual Retirement Accounts will have to follow the new higher standards. Higher costs and lower returns cost American families $17 billion a year, according to President Obama’s Council of Economic Advisers.
Some analysts estimate that the rule has the potential of driving more money into low-priced index funds, which have already been gaining in popularity as more investors become conscious of the fees they pay and skeptical of the ability of fund managers to beat the broader market.
In the future, an adviser will have a fiduciary duty: he must recommend an investment that is not only suitable, but also offers the best long-term payout.
The change could alter the types of investments – from stocks and bonds to annuities and real estate funds – that brokers recommend for people’s retirement accounts.
Not all communications between financial advisers and their clients will be covered by the new regulations, and the final rule makes explicit some of those situations: financial education, general communications like newsletters or public remarks, or dealings with other fiduciaries, for example. About $4.5 trillion were in 401(k) retirement accounts as of September 30, plus $2 trillion in other defined-contribution plans such as federal employees’ plans and $7.3 trillion in IRAs, according to the Investment Company Institute, an industry group. In addition, they must avoid misleading statements about fees and disclose any conflicts of interest. If you presently work with a financial professional who gives you retirement advice and or investment recommendations for your IRA, ROTH IRA, rollover IRA, inherited IRA, SEP IRA or spousal IRA that relationship is about to be redefined. “An adviser shouldn’t be compensated for selling something someone told them to sell”. They may also move away from those accounts if they worry the accounts may lead to more regulatory scrutiny, analysts say.
“You’re not going to get a sales pitch that’s disguised as advice”, says Micah Hauptman, financial services counsel for the Consumer Federation of America.
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Will the new rules could prompt brokers to stop serving accounts with smaller balances? Under the original version of the plan, advisors and customer-service representatives would have had to sign a new contract each time they spoke with a customer. It requires financial advisers to put client interests first.
