The Department of Labor’s new fiduciary rule directed at altering the way the financial industry delivers retirement savings advice stirred a string of reactions from brokerages, mutual fund companies, analysts as well as politicians. The Securities Industry and Financial Markets Association, the lobbying arm of the financial world, said, “This proposal would lead to a number of negative consequences for individual investors”. “I am fearful that those concerns, which were widely and bipartisanly held, will prove to be true once the rule becomes effective”. Berlau cited the effect of a similar regulation in Britain where the unintended outcome prompted financial advisers to focus primarily on wealthy investors.
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“Today’s rule ensures putting the clients first is no longer a marketing slogan”, said Labor Secretary Thomas Perez while announcing the final rule on Wednesday at the Center for American Progress.
The new rules from the Labor Department require brokers to not only give advice that is suitable, but in their clients’ best interest.
The rules cover only retirement accounts. Oftentimes, the difference between various investment products can seem inconsequential - the average investor may not be too alarmed when their adviser suggests they invest their savings in a fund that charges a one percent management fee.
“Brokers are salespeople. They sell whatever they and their firm make the most money on”, argues Harris.
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”.
Some firms may decide to move investors from commission-based accounts to fee-based accounts, where funds may be managed by a financial adviser and an investor’s costs may be structured as a percentage of assets invested, instead of a fee per transaction, according to a report released in October by the fund research firm Morningstar.
That proposed safe harbor would have been in direct contrast with the fiduciary standard defined in ERISA, which expressly says prudent investments are not necessarily the cheapest.
The group is also concerned with the fact that, under the rule, many rollover conversations would trigger a fiduciary duty.
The rules apply only to retirement accounts.
You may have thought that all financial advisers act in their clients’ best interests.
Registered investment advisers have already been held to a fiduciary standard. Barack Obama’s Council of Economic Advisors estimates this system costs Americans saving for retirement $17 billion every year.
“Although the rule is still new, it appears to be the best reform for retirees I’ve seen in my career”. “An adviser shouldn’t be compensated for selling something someone told them to sell”.
“IRAs are a key part of creating retirement security, so we agree with the requirement that distribution advice be subject to the same fiduciary standard as all other investment advice”.
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But it would be naïve to think that investors won’t be the ones to eventually pay the costs of this new law.
