The Department of Labor is proposing new, not-yet-public rules regarding financial advisers and fiduciary standards, which require them to put clients’ best interests first. President Barack Obama is supporting the proposal, Melissa Winn writes for Employee Benefit Adviser, and the White House has released a fact sheet on the proposed changes.
The proposed rules are expected to expand the types of investment advice subject to the Employee Retirement Income Security Act (ERISA), Winn writes. New rules will likely also tackle what Ashlea Ebeling, writing for Forbes.com, calls “aggressive marketing of IRA rollovers.” Today most of America’s retirement savings are in IRAs, not ERISA-protected pensions or 401(k)-type plans,” she writes. “There’s $7.2 billion in IRAS, $5.3 trillion in defined contribution plans like 401(k)s, and $3.1 trillion in defined benefit pension plans.”
The National Association of Plan Advisors says it’s possible the proposed regulation could have its own negative consequences: “keeping many Americans from working with the trusted adviser of their choice, even in the critical decision regarding rollovers from their 401(k) and 403(b) plans,” Winn writes.
Advisers who currently provide financial-planning or portfolio-management services already do so under a fiduciary standard, writes Matthias Rieker for the Wall Street Journal, “which requires them to put their clients’ interests first. They typically charge fees for this work.” In other instances, they may act as salespeople who sell securities, insurance or other products on commission.
“A typical ’dual registrant’ is registered with the Securities and Exchange Commission or a state securities regulator as an investment adviser, a role that carries fiduciary duty, while also being supervised by the Financial Industry Regulatory Authority as a representative of a securities firm,” Rieker writes. Those who work in financial planning have been moving away from commission, but in some cases, such as bond portfolios that are relatively static, it can serve a client’s best interests to charge a one-time commission.
“Most advisers and advocates agree that for investors who need an adviser to manage an entire portfolio…an annual management fee is the way to go,” Rieker writes. “That’s because commission would add up, and charging fees reduces any worry that an adviser recommends the investment that pays the highest commission rather than the one that’s best for the client’s finances.”
The debate is heating up as various stakeholders weigh in on the possibility of new rules. They’re not done deal, by any means. ”Republicans will hold majorities in both chambers for the rest of (the Obama) presidency,” Kenneth Corbin writes for financialplanning.com. “That raises the specter of fresh efforts to derail the fiduciary proposal, either through legislation barring the new rules or language in an appropriations bill prohibiting the use of any funds to further their implementation.”
And even if sweeping changes become law, that won’t be the end, he writes. “There is the looming prospect of a lawsuit industry groups might bring challenging the Labor Department’s fiduciary regulation,” Corbin writes, “a near certainty if the final rules include significant checks on the current brokerage model.”