The Labor Department, which regulates tax-advantaged savings accounts, is bringing more investment advisers under an already existing rule known as the “fiduciary standard,” which requires financial advisers to put their clients’ best interests ahead of their own profits.
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In the past, brokers and advisers have been generally required only to recommend “suitable” investments, which means, for example, that they can push a more expensive mutual fund that pays a higher commission when an otherwise identical, cheaper fund would have been an equal or better alternative.
Of note is the fact that, in the weeks leading up to the rule’s release, there have seen a flurry of the changes from big wealth management companies that many advocates say investors have needed for years.
A new fiduciary standard to be released Wednesday by the Department of Labor broadens the definition of fiduciary advice for anyone giving investment advice but allows plan sponsors and their advisers to continue to provide investment education without being considered fiduciaries. If a Republican were to win the presidency and take over in early 2017, when the rule is still being put into effect, the new administration could try to dismantle the regulations.
Financial services executives have said the new rule will create unnecessary paperwork and could cause some firms to stop handling savers with smaller accounts. Conflicted investment advice costs savers $17 billion a year, according to an estimate from the White House Council of Economic Advisers. The new rule plugs some holes so that anyone who offers advice on retirement accounts falls under the stricter standard. Both brokers and registered investment advisers will be required to adhere to this same new fiduciary standard.
The rule covers only advisers receiving compensation on investment recommendations made to plan sponsors running a company retirement plan, or who are making recommendations to individual IRA holders. “If your business model rests on bilking people out of hard-earned money in retirement plan accounts, you don’t belong in this industry and you will not like this final rule”.
Perez said the rule’s “forward-looking point-of-sale disclosures were pretty heavily criticized, so we eliminated entirely the one-, five- and 10-year forward-looking disclosures, as well as the annual disclosure requirement”.
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“The fiduciary rule is like Obamacare for your IRA and 401(k)”, Berlau said in a statement. And now that rule also applies to financial advisers. Brokers may persuade them to put those assets into variable annuities, real estate investment trusts or other investments that can be risky or otherwise not in the client’s best interest. Today, the bulk of US retirement assets – over $7 trillion – are held in IRAs, compared with $2.9 trillion in traditional pensions. While some financial groups opposed to the expected ruling have said that they will be forced to re-evaluate or drop clients, it is not yet clear how this claim will manifest. 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.
