Even though the Obama administration is arguing that the new legislation it is supporting protects investors from bad advice, critics warn that the recently enforced policy sounds like another controversial law. That’s what it takes to change the mindset that has made retirement vehicles a fee-driving machine for its managers.
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New regulation of financial advisers and brokers handling individual retirement and 401(k) accounts is expected to encourage a shift of retirement funds into lower-cost investments while setting off one of the biggest upheavals in the financial services industry in decades. That is tougher than aprevious standard in which they had to ensure products were ” suitable” for clients.
The Labor Department “meaningfully softened” the rule, Morgan Stanley insurance analysts said, characterizing it as “good news for those companies impacted”. The rules are the result of Obama Administration efforts to reduce conflicts of interest in retirement savings industry.
“It’s pretty obvious if people are expecting financial advice they should be able to count on the fact that it’s going to be real advice to help improve your situation”, says Bill Harris, the CEO of Personal Capital and former CEO of PayPal.
While it will take time to analyze all the final details, Morgan Stanley has been planning for the fiduciary rule since it was initially proposed by the Labor Department, according to Christine Jockle, a spokeswoman. Last year a report by the White House Council of Economic Advisers estimated the rule could save retirement investors $17 billion a year. The new fiduciary standard only applies to tax-advantaged retirement accounts such as 401(k)s and IRAs.
At the outset, the final rule looks to be less costly for firms than the original proposal-with the DOL “minimizing” the compliance burden and eliminating certain requirements. As Jack Bogle told the Financial Times, “If the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated”. However, any new advice will be required to be in the best interest of the client and only charge a reasonable amount of compensation.
In discussing the final rule, Labor Secretary Thomas Perez said, “For firms that have millions of existing customers that would require a BIC under the final rule, there are also changes”.
Brokers? Financial advisers? What’s the difference? Yet investors should also be ready to hold their advisors accountable to the regulation.
Registered investment advisers, on the other hand, are “fiduciaries“. Both the firm and the adviser must avoid misleading statements about fees and avoid conflicts of interest.
Education is not included in the definition of retirementinvestment advice, allowing advisers to offer basic informationwithout acting as fiduciaries.
The rule will likely have a number of consequences including limiting the ability of IRA companies to talk to potential investors or to recommend specific investment advice.
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Eventually, your financial adviser will ask you to sign a document called a “best interest contract”, which will establish a fiduciary relationship between the two of you.
