Posted by on Aug 24, 2015 in Articles & Advice, Blog, Columns, Featured |

Image Credit: Christophe Vorlet

By Jason Zweig | 11:35 am ET  Aug. 21, 2015

The traditional way of giving retirement advice is getting retired.

After a tug of war with the financial industry that has lasted more than five years, the U.S. Department of Labor is moving ahead on rules that will require anyone providing investment advice on your retirement plan or Individual Retirement Account to act in your best interest.

For brokers and financial advisers — and their clients — the new rules could be the biggest change since stock-trading commissions were deregulated in 1975.

Thousands of advisers will have to change how they do business — or go out of business. Millions of investors should end up better off. But it will be a bumpy ride along the way.

At stake is one of the financial world’s biggest honey-pots: the more than $14 trillion in IRAs and 401(k)-type retirement plans.

Under the Labor Department’s proposed rules, anyone providing investment advice on a retirement account would have to become a “fiduciary” for the client.

A fiduciary must act in your best interest. That means being prudent and careful, not misleading or taking advantage of you, and seeking to minimize and disclose conflicts of interest.

The new rules would generally require an adviser offering individualized retirement advice to sign a contract detailing his fiduciary obligations; provide exhaustive information about fees and expenses; earn “no more than reasonable compensation”; and adopt specific procedures to minimize conflicts of interest. Clients could also sue the adviser for breaching fiduciary duty.

The proposals provoked more than 2,600 public comments, petitions with more than 330,000 signatures, and letters from at least 119 members of the U.S. House of Representatives and 19 U.S. senators. Many contended that the rules would drive up costs for companies and consumers, put commissioned brokers out of business and deprive less-wealthy investors of access to advice.

Some brokerage executives hope that in the face of such vehement opposition, the Department of Labor will back off. “That isn’t going to happen,” U.S. Secretary of Labor Thomas Perez told me this week. “We will be forging ahead, and we fully expect to finalize a rule by early next year.”

The proposed rules are far from perfect. Mr. Perez won’t say exactly which provisions might be softened before they are finally implemented. But, he says, “the final rule will contain a number of changes that reflect material improvements based on the feedback we’ve gotten from the [financial] industry.”

One big concern: Giving investors the right to sue could have “a chilling effect on people giving advice,” says Ann Combs, head of government relations at Vanguard Group and a former assistant secretary of labor under Pres. George W. Bush. “Those we’re trying to encourage to offer retirement plans, especially small companies, don’t want to go anywhere near anything where there could be plaintiffs’ lawyers bringing suits.”

Advisers will have to project the dollar amount of future fees that each investor will incur based on his or her unique portfolio. Ms. Combs calls that provision “complicated, onerous and expensive” and worries that “if returns don’t turn out the way they were projected, there’s potential for investors to be confused and upset and to litigate.”

The brokerage industry says the extensive new requirements on disclosure and record-keeping will make providing advice to less-wealthy investors prohibitively expensive.

But the typical big brokerage firm already embraces small investors about as enthusiastically as a germaphobe forced to give hugs in a leper colony. If you have less than $1 million, good luck getting face time with your adviser; at less than $250,000, your adviser will be a desk in a call center.

Increasingly, automated investment services or “robo-advisers” are stepping up to manage small accounts online at ultra-low cost. The new rules will only accelerate that trend.

“The explicit discussion of compensation has to drive costs down [for consumers],” says James Osborne, president of Bason Asset Management, a firm in Lakewood, Colo., that manages about $100 million and charges only retainer fees.

Still, much as the widely feared deregulation of commissions in 1975 ended up giving a boost to the brokerage business, the new rules could ultimately be good for Wall Street. Even with the new regulatory burden, says Mr. Osborne, brokers will still thrive, given the trillions of dollars of assets at stake.

“It’s ludicrous for people to say that ‘the only way I can provide service to a client is to put my best interest over the client’s,’” says Mr. Perez. “Putting your customer first is good for the customer, and it will be good for the provider.”

As the regulatory rule moves toward implementation, investors should remember a few rules of their own.

A broker or adviser who serves as a fiduciary over your retirement assets doesn’t necessarily have to act in your best interest when managing your other assets; make sure you ask. A fee-only adviser isn’t always the cheapest or best option, depending on your needs. Everyone giving investment advice has some conflicts of interest, no matter how he charges. And no amount of regulation can exempt you from the responsibility of being a skeptical and attentive investor.

Source: The Wall Street Journal