New Rules To Change Relationship With Financial Advisor



A new regulation, issued under President Obama’s administration, went into effect on Friday. The new fiduciary rule will require retirement brokers to put their clients’ interests ahead of their own. Consumer advocates, lawmakers, and retirement groups have been pushing for the regulation for more than six years.

President Donald Trump earlier on the year requested the Labor Department reevaluate the regulation in order to determine its potential harm for investors. In April Labor Secretary Alexander Acosta announced no significant evidence could further delay the implementation of the regulation.

The expanded fiduciary rule provides a much higher level of accountability than before. The rule demands that advisors act in the clients best interests, putting their clients’ interests above their own, when advising 401(k)’s and individual retirement accounts; leaving no room for advisors to conceal any potential conflict of interests. The definition also has been expanded to include any professional making a financial recommendation or solicitation. The goal is to try and save consumers from high fees and provide better confidence that their financial advisors are on their ‘side’.

“In order to demonstrate compliance with the standard under the new rule, advisors will have to develop a paper trail. For rollover advice, advisors need to show a comparative analysis between the costs and services offered in [an] IRA and the 401(k) in order to stay out of trouble,” Senior policy analyst Duane Thompson at Fi360 said.

The Obama administration had concluded that brokers were boosting their compensation by pushing clients into high fee products instead of more conservative alternatives. Savers were estimated to have lost ~$17 billion a year as a result of the sometimes deceptive advice. Consumer groups have long showed concern over the potential for conflicts of interest; calling on lawmakers and regulators to look into the $14 trillion industry. At times, some companies offered personal perks in order to entice brokers to advocate their products.

Many financial advisors have now switched to charging a flat fee as a percentage of assets managed, opposed to collecting a commission.

Critics of the rule argue the increased compliance costs could potentially make it too expensive for them to manage the smaller accounts of low income individuals. There is also concern that the rule allows investors to put together a class action lawsuit over violations, rather than go through the arbitration process; providing another disincentive to take on small customers which would require a group investment.

The fiduciary rule has and will continue to face fierce opposition from the Republican party and industry groups. Efforts by Republican officials to weaken the rule after the election were intensified; arguing the rule will raise legal costs and limit options for investors. The House of Representatives passed a regulatory reform bill on Thursday; within the bill was a provision that would repeal the fiduciary rule and block the Labor Department from proposing a new fiduciary standard until after the Securities and Exchange Commission (SEC) puts forth its own standard.

Some financial firms and industry groups have speculated that the rule may have unintended consequences of limiting clients’ options. Its argued some brokers could choose to eliminate investment options with different fee structures that they fear will face more scrutiny under the rule.

SEC chairman Jay Clayton recently announced that he would seek input about the fiduciary rule. The Labor Department also announced last week that the rule would take partial effect, and full enforcement of the regulation would not start until January.



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