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.
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Many investors are satisfied if they do as well as the market or nearly as well, but that should not be the case.
Industry opponents of the rule have sought avenues to stop it in Congress. But the administration retains the power of a presidential veto to impose its will, says Ron Rhoades, head of the financial planning department at Western Kentucky University.
In a long-anticipated move, the U.S. Department of Labor on April 6 unveiled a final rule that raises the bar for investment advice provided to retirement savers. Put another way, less-affluent clients account for only a small share of any advisor’s client roster, not just those following the fiduciary standard.
To fill the void, many experts predict the regulations will fuel the rise of so-called robo-advisers, or firms that offer automated portfolio construction and management for a lower fee than a traditional professional adviser. While a number of advisors are fiduciaries – meaning they are in charge of managing assets – people sometimes also can receive “what they think is advice from someone who they think is a counselor and are then being sold to by a non-fiduciary – that is fraud”, said McBride.
Advisers will still be allowed to accept commissions and bonuses, but they will be required to disclose that information to the investor. For instance, brokers operating under a suitability standard might let the commission attached to a product influence their recommendations.
“With the finalization of this rule, we are putting in place a fundamental principle of consumer protection into the American retirement landscape”, said Labor Secretary Thomas Perez on a conference call with reporters. And they have shown that they will stop at nothing to keep these fees. In that way, they’re more like doctors or lawyers – obligated to put their clients’ interests even ahead of their own.
The new rules could shake up how brokers handle billions of dollars in Americans’ retirement investments. Financial advisers who manage other types of investments may not be held to the same standard. Firms would also show that they have taken on measures to help clients avoid any negative effect from any conflicts that arise.
Some financial companies and groups are considering taking the government to court over the new rules.
The financial industry warns that the new requirements for brokers will likely reduce investors’ choices of financial products and could cause brokers to abandon retirement savers with smaller accounts.
Democratic Senator Joe Donnelly says he’s still studying the final rule, but says he’s been concerned that it could make it harder to get retirement advice.
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Still, some firms’ traditional business models face a big challenge. 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.
