The Labor Department recently announced new rules for retirement planning advice that could save investors a lot of money. Put simply, the new rules require brokers and advisers to put their clients’ interests first when offering retirement planning advice. While it seems as if this is something that the brokers and investment advisers should already be doing, these rules are designed to make sure that all advisers are in compliance. Financial firms would have until January 2018 to get into compliance.
New Standards Under The Rules
The new rules create a new standard for brokers and advisers that is stricter than current regulations. Currently, brokers are categorized as registered representatives and are only required to recommend “suitable” investments based on an investor’s personal situation. After the implementation of the new rules, a broker that is handling retirement investments must act exclusively in your best interest, even if it would cost the broker some potential income. Investment advisers, who generally must register with the Securities and Exchange Commission or a state securities regulator, are already charged with putting their customers’ interests first under a fiduciary standard, regardless of what accounts they work with.
The rules from the Labor Department are intended to guard retirement investors from poor or conflicted investment advice. According to an estimate from the White House Council of Economic Advisers, conflicted investment advice costs these savers roughly $17 billion a year. The implementation of the rule should reduce the number of retirement savers being steered into complicated and pricey investments, leaving them with more money in their accounts.
The rules are also supposed to improve disclosures about conflicts of interest. In many cases, a firm is paid by a mutual fund company or other third party for recommending a particular investment. While the new rule won’t ban commissions, brokers may have to explain why they are recommending a particular product when a less expensive option is available. Some firms may decide to move investors from commission-based accounts to fee-based accounts, where what brokers and advisers are paid would not depend on the type of investment product they sell.
What Industry Insiders Say About The New Rules
Critics have voiced concerns that the new rules would not go far enough to properly protect investors. The final rules clarifies that there is no bias against selling proprietary products. It also has no specific language regarding the need to disclose the amount of fees and other charges being paid. These issues have been responsible for many of the problems and abuses seen in litigation and arbitration against brokerage firms over the years.
However, many proponents of the rule change said they believe the final rule is balanced on the whole, including the Financial Planning Coalition and the Consumer Federal of America. Regulators are requiring firms that only sell proprietary products to fully disclose that they are offering a restricted menu of products and they must offer a best-interests contract to customers. All new money being invested must be in the best interest of the client and any new retirement planning advice for money already invested must be as well. If advisers do not adhere to the standards, retirement investors would have greater recourse to recover their money.