Is the professional who is selling you investments looking out for you – or his own pocketbook? That’s the question at the core of a proposed Department of Labor (DOL) rule that could dramatically affect how reps provide advice on individual retirement accounts (IRAs) and other retirement products.  

Under existing rules, registered investment advisors have to adhere to the so-called fiduciary standard, which means recommending products that are in the best interests of the client, regardless of how it affects their compensation. See What You Need to Know About the Fiduciary Standard for additional insights.

However, most brokers and insurance agents who sell retirement products are held to the lower suitability test. Any advice they offer has to be suitable given the investor’s age and financial goals. But it’s widely believed that this standard leaves more wiggle room for professionals who get generous commissions for selling certain products. To learn about the differences between these standards, read Suitability vs. Fiduciary Standards.

If approved, the new Department of Labor rule would hold brokers to that higher fiduciary standard as well. Those who provide “conflicted advice” would face an excise tax and could be forced to amend the transaction. For more on the new rule, see What the DOL's Fiduciary Rule Means for Advisors and Fiduciary Designations for Financial Advisors.

What It Means

It all started when President Obama urged the DOL to make the change back in February. “It's a very simple principle,” he said, during an address to AARP. “You want to give financial advice, you’ve got to put your client’s interests first.”

The DOL went on to propose the rule in April, at which time it began accepting comments from industry groups and the public. The department is likely to approve the measure in early 2016, although it’s still possible that it could tweak the rule before then based on feedback. 

The lack of a fiduciary requirement has long rankled consumer rights groups, which argue that some brokers and insurance agents are swayed more by the commissions they make than the welfare of their clients.  Further complicating matters is the fact that some sales reps call themselves “advisors,” even though they’re not registered with the Securities and Exchange Commission and aren’t subject to the same stringent standards.  

Indeed, the amount of compensation that reps receive can vary widely from one product to the next. For example, a professional may have an incentive to sell a mutual fund with a sales charge, or load, rather than a similar no-load version because it provides them with a commission.

The DOL suggests that a bias toward high-commission investments can significantly impede retirement savings. “[Conflicts of interest] lead, on average, to about 1 percentage point lower annual returns on retirement savings and $17 billion of losses every year,” a DOL fact sheet concludes. It sees a broader application of the fiduciary standard as an important step in addressing that challenge.

While the rule would affect specific advice, including which investments to buy and when, it would provide sales reps with certain exceptions:

  • Education-related activities. Under the suggested rule, brokers and others who sell investment products would be able to provide “general education” without having to meet the fiduciary criteria. For example, reps could suggest an appropriate mix of retirement assets for someone of a certain age, as long as they don’t recommend specific stocks or debt instruments.
  • Order-taking. When a customer contacts a broker and asks him or her to purchase or sell a security, it’s not considered investment advice. Under the proposed rule, this order-taking wouldn’t qualify as a fiduciary role.
  • Selling to plan providers. In some cases, a broker may try to sell financial products to the people who administer retirement plans on behalf of an employer. These individuals are financial experts in their own right and typically have a fiduciary responsibility for their clients. Marketing to such individuals does not constitute a fiduciary activity for the broker.

Objections to the Rule

Needless to say, not everyone is lining up in favor of the change. Groups representing investment advisors say the new rule would unnecessarily complicate financial transactions, with brokers and insurance agents having to ask for more detailed information than ever before from customers. They say the proposal would not only increase their cost of doing business, but open them to undue legal liabilities. 

Critics also argue that the rule, by its very nature, is hard to enforce in a fair manner. Judging what’s in the best interest of the client is a subjective undertaking. And just because someone makes a sizable commission doesn’t mean he or she is selling a bad product. 

A better solution, some say, is to simply increase transparency without fundamentally altering the broker’s role. The Securities Industry and Financial Markets Association (SIFMA) has put forward a new standard of its own that would require reps to disclose their potential conflicts of interest before selling investment products. However, it would not subject brokers to the fiduciary standard. 

They’re getting at least some support in Congress. A bipartisan group of legislators – Representatives Richard Neal, D-Mass.; Peter Roskam, R-Ill.; Phil Roe, R-Tenn.; and Michelle Lujan Grisham, D-N.M. – recently announced that they were working on a bill to replace the fiduciary rule with an additional disclosure requirement. But any efforts to derail the measure face an uphill climb, especially with a president who fully supports it.  

The Bottom Line

Most experts agree that investment advisors should do right by their clients when suggesting financial products. But whether a broader fiduciary rule is the way to do so is still the subject of heated debate in Washington, D.C.





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