Zients noted on the Tuesday afternoon call that a little over a year ago President Barack Obama “called for action to crack down on conflicts of interest in retirement advice, which costs American families billions of dollars every year”.
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“A outcome of that definition is that virtually all common investment and insurance sales to plans, participants and IRAs will be fiduciary acts”, Reish said. Yet under the current loophole, advisers are only required to recommend products that are considered suitable-in other words, that generally meet their investment objectives-instead of being required to recommend the best options available. Campbell, counsel at Drinker Biddle & Reath LLP, will provide an overview of the final rule with emphasis on what has changed from the proposal; the scope of rule’s application (basis for fiduciary status); implications for product manufacturers and distributors; and the most significant areas of litigation risk.
The update was necessary, the Obama administration said, to add protections for consumers who are often overwhelmed by a long list of investment choices and may have had no idea that their broker could profit by offering one mutual fund over another.
Perez said that provision was inserted in the final rule after some commenters expressed concern that advisors would need to present a contract as soon as someone walks in the door – before they’ve even decided whether to hire that advisor.
The rule, requiring broker-dealers who provide advice to follow a “fiduciary standard”, will take full effect on January 1, 2018, according to the Labor Department.
The anticipated release of the rules had been the target of heated lobbying campaigns from both the financial industry and consumer advocates.
At stake are about $4.5 trillion in 401(k) retirement accounts, 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. It requires better disclosures all around, and contractual agreements that ensure investors know what they are getting.
After the better part of a decade in the making the new fiduciary rule from the Department of Labor has finally arrived, and on first review it appears to look a lot like the version proposed in the Spring of 2015, albeit with some important softening around the sharpest edges.
“I am quite confident that the industry will be able to comply”, said Mr. Perez, who acknowledged that a “small but boisterous minority will remain” opposed to a new standard.
These new rules, he continued, “will level the playing field so that retirement advisors will compete based on the quality of advice that they give”. 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. Indeed, Perez said that the agency received 400,000 comment letters on the proposal.
In the future, an adviser will have a fiduciary duty. “We listened, we learned and we adjusted”, he said.
Also, the compliance requirements for BICE have been “greatly simplified” under the final rule, Reish adds.
Brokerages and lawmakers were also concerned about an earlier requirement that brokers sign contracts with clients at initial meetings.
“Now all costs will be fully disclosed”, he said.
Under the final exemption, transaction disclosure is simplified to focus on the firm’s conflicts of interest, the website disclosure is streamlined but still created to enable third parties to help customers evaluate different firms’ practices that may affect advisors’ conflicts of interest, and the annual disclosure is eliminated entirely, agency officials said.
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There are also allowances for small 401(k) plans.
