The Broker Is Dead! Long Live the New Fiduciary Broker!
NEW YORK -- A new fiduciary rule proposed by the Department of Labor would tighten rules on brokers who work with millions of Americans' retirement accounts. The change would change the way retirement plan advisers are paid, with the goal of eliminating conflicts of interest, and require them to always act in their clients' best interests.
The White House, which is behind the proposal, says the conflicts of interest it is intended to address are costing investors $17 billion a year. That is based on an estimate that $1.7 trillion of IRA assets are invested in products that generate conflicts of interest resulting in 1 percentage point in extra yearly costs.
Backers of the rule say brokers not held to the fiduciary standard encourage savers to move nest eggs from low-cost employer-sponsored plans to IRA accounts, which typically charge higher fees. They also, according to the White House critique, steer savers into higher-cost IRA products.
Practical effects of the change, described as the first major overhaul of retirement adviser regulation in 40 years, could be significant. "It is a huge deal," said Brian Menickella, head of retirement and financial planning at The Beacon Group in King of Prussia, Pennsylvania. "It's going to be enormously impactful," added Menickella, who supports the rule change.
Brokers commonly receive commissions when they sell IRA investment products such as mutual funds. Commissions are higher on some products than others, critics say brokers too often recommend products that pay high commissions when others would be more in line with the client's interests. Brokers can do this under current rules, as long as the investment is suitable to the client's needs. The new standard would raise the bar to require advisers act in clients' best interests.
Joe Pieffer, an attorney and acting president of the New Orleans-based Public Investors Arbitration Bar Association who is in favor of the change, says that will put more money in savers' pockets. "For some people, it's the difference between having enough money to retire and not having enough money to retire," he says. White House figures show reducing returns by 1 percentage point, the estimated average cost from conflicted recommendations, could reduce a saver's nest egg by more than 25 percent over 35 years.
Advisers currently licensed as registered investment advisers, rather than as broker-dealers, are already held to the fiduciary standard. RIAs such as Menickella anticipate that many brokers will seek to go through the more rigorous RIA licensing process.
Critics say conforming to the rule will place undue cost burdens on broker-dealer firms. The Financial Services Institute, a Washington, D.C.-based group of independent broker firms, says it will cost firms nearly $3.9 billion to implement the rule.
The FSI and others warn that if it goes into effect smaller investors may find it impossible to get advice for investing their retirement savings. Menickella is doubtful. "RIAs have been doing this all along," he says. "It's not like the model doesn't work."
Pieffer says the financial services industry often makes similarly dire predictions about regulatory proposals, but they aren't always fulfilled. "When we deregulated commissions you could make on stock trading, they predicted calamity," he says. "They've survived."
The Department of Labor oversees worker retirement accounts, so it is the federal agency charged with creating the rule. That process is currently at the comment stage and many observers feel a final rule is likely soon. "This is going to happen," says Pieffer. "I think it's going to happen by the end of the year."