A New Retirement Rule Aims To Put Customers Before Advisors
Americans today have around $14 trillion in retirement savings. Under new regulations issued by the Labor Department on Wednesday, the rules around how financial advisors can invest that money on behalf of clients are about to change.
Under the new rule, more than six years in the making, registered investment advisors and brokers will be required to provide investment advice that’s in the best interest of their clients, a benchmark known as the fiduciary standard.
Previously, a large share of financial advice was often only required to be “suitable” for clients. That standard, according to critics, freed the way for brokers to recommend investments that earned them higher commissions, even if a cheaper alternative would have been better for the investor.
For decades, registered investment advisors have been obligated by law to act in their clients’ best interest. But registered investment advisors represent only about 15 percent of the industry. The remaining 85 percent of brokers and others other types of advisors offering retirement advice are often not bound to the fiduciary standard.
The White House has argued that conflicted retirement advice costs investors at least $17 billion each year in lost savings — a figure that leaders in the financial services industry call greatly inflated.
“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.
The unveiling of the rule follows a lengthy and often contentious debate between regulators, industry officials, consumer advocates and lawmakers in Congress. Before finalizing the rule, the Labor Department held four days of public hearings with testimony from nearly 80 individuals and organizations. It also received more than 3,000 public comments on the plan.
The rule still allows brokers to earn commissions and other forms of compensation, but in order to recommend products that might pose a conflict they will first have to enter into an enforceable “best interest contract.” Firms will also be required to disclose conflicts of interest, and provide more detailed disclosures about costs, fees and how they make their money.
Changes won’t come overnight. The original plan called for an eight-month implementation period, though in a key concession by the Obama administration, firms will not have to be fully compliant until Jan. 1, 2018.
The final rule includes several other concessions to the financial services industry, which launched an aggressive lobbying campaign against the regulation, arguing that changes would make investment advice costlier and thus less accessible to millions of Americans. For example, firms will only be required to sign one best interest contract with clients when they open an account. 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.
Still, the final rule preserved several key points long sought by the administration and consumer advocates. One goal of the plan is to safeguard investors when they roll over money from a 401(k) plan into an IRA. Before the rule, this type of recommendation was considered one-time advice, which meant it was often not held to the fiduciary standard. The administration has argued that rollovers based on conflicted advice could rob a typical investor of as much as $12,000 in retirement savings.