Department of Labor Announces Final Fiduciary Rule
The Department of Labor has announced their final version of the fiduciary rule that affects financial advisors. In their research, the Department of Labor stated that they found some financial advisors or the companies they work for weren’t always acting in the best interest of their clients in order to gain a higher return off of them:
“While many investment advisers acted in their customers’ best interest, not everyone was legally obligated to do so. Instead, the broken regulatory system had allowed misaligned incentives to steer customers into investments that have higher fees or lower returns—costing some middle-class families tens of thousands of dollars of their retirement savings.”
The President’s Council of Economic Advisers’ research noted:
- Middle class families who received this “conflicted advice” earned 1 percent less in annual returns vs. those that received sound advice
- $1.7 trillion of IRA assets were invested with conflicted interests
- When rolling over a 401(k) to an IRA could lose a large percentage of his/her retirement savings when they’ve been given conflicted advice. They give an example:
- “If a worker has $100,000 in retirement savings at age 45, without conflicted advice it would grow to an estimated $216,000 by age 65 adjusted for inflation, but if she receives conflicted advice it would grow to $179,000—a loss of $37,000 or 17 percent.”
What does the new fiduciary rule aim to do?
This rule aims to legally obligate financial advisors to always act in the best interest of their clients before thinking of their own gains, and many financial advisors agree that this is good. However, brokers and financial advisors don’t operate in the same way.
CNBC explains that there are two different kinds of advisors: brokers and investment advisors. You can purchase stocks, bonds, ETFs and mutual funds from both, but the way they make money is different. Brokers gain from commissions on the investment products, so they can sell anything that is technically “suitable” for the client regardless of whether that is the best return for the client. However, investment advisors operate with fees, so they are held to a higher standard of finding the absolute best product for the client, looking out for their best interest.
The White House’s findings seem to point towards some brokers selling products at a higher cost to their clients in order to gain higher commissions. So, this new rule appears to be beneficial to investing clients, but how do brokers and advisors feel about it?
There are opposing viewpoints to the DOL’s new fiduciary rule. Some point out that the rule is a step in the right direction for consumers’ best interests.
Roger W. Ferguson, Jr, President and CEO of TIAA, an investing firm, commented on BusinessWire.com:
“Putting the customer first is a core TIAA value, and we believe adhering to a best interest standard under the Department’s new regulation is an important way to help more people build financial well-being. IRAs are a key part of creating retirement security, so we agree with the requirement that distribution advice be subject to the same fiduciary standard as all other investment advice. This will ensure that rollover discussions, including whether to roll over from an employer-sponsored plan to an IRA, are always in employees’ and retirees’ best interest. Based on our preliminary analysis, it appears the Department has gone a long way toward making the best interest standard the industry standard. TIAA supports this direction, and we look forward to reviewing the full rule.”
On the other hand, others are disapproving of the amount of paperwork the new rule will require that could make getting financial advice harder or unaffordable for low and middle-income savers.
House Speaker Paul D. Ryan has been openly opposed to the rule over the past couple months of drafting. On his blog, he has spoken out about the fiduciary rule:
“Like Obamacare, the fiduciary rule requires an enormous amount of paperwork and makes recordkeeping more expensive. Like Obamacare, it will result in higher costs and fewer options for small businesses trying to get up and running. Families with modest bank accounts seeking expert advice will no longer be able to justify the expense. Like Obamacare, the fiduciary rule may have a noble intent, but it’s another one-size-fits-all regulation that’s bad for Americans.”
Though this opinion isn’t opposing or praising the rule, Eric Clarke, chief executive of Orion Advisor Services, did point out in an InvestmentNews article that advisors need to be thinking of how they can lower their operating costs with technology. He explains that the new rule will affect some advisors’ income and that adopting technology is a must if you want to maintain your current profitability level.
To see a list of changes from the proposal to the final version, here’s a chart from the DOL.
How will this affect your agency?
Share your thoughts on how the Department of Labor’s new fiduciary rule will affect your agency or the industry as a whole: