Six years in the making—and with plenty of dissent from Wall Street—new rules issued by the Department of Labor in early April promise to change the way the financial industry manages billions of dollars in retirement savings.
Until now, financial professionals have been required to meet a “suitability standard,” meaning they could steer clients toward high-fee, commission-based products as long as such products were suited to an investor’s goals and objectives. Under the suitability rule, the average investor might never know that a less expensive product could achieve the same or better result.
Soon—as early as next spring—financial professionals who advise on individual retirement and 401(k) accounts will be required to meet a “fiduciary standard.”
If you’re a Cardiff Park client, you’re already familiar with this term (and if not, it’s time to review our website). A fiduciary is required to consider client interests ahead of company or personal interests. Practically speaking, this means a fiduciary won’t peddle products with high fees or undisclosed commissions; to do so would clearly not be in clients’ interests if lower cost alternatives were available. A fiduciary is also likely to discourage frequent trading in favor of a long-term, buy-and-hold investment strategy. If all this sounds familiar, congratulations, you’ve chosen the right advisor.
As expected, Wall Street fought hard against the new rules, and the resistance is understandable. According to The New York Times (6-April 2016), academic research compiled by the Obama administration reveals that “conflicts of interest embedded in the way many investment professionals do business cost Americans about $17 million a year, leading to annual returns that are about 1 percentage point lower.” The same article reports that IRA accounts held $7.3 trillion at end of 2015, and 401(k)-type plans held $6.7 trillion. That’s billions of dollars in financial industry commissions at stake when the fiduciary rules go into effect.
When the rules were announced, the advisory industry issued warnings about the difficulty of compliance and potentially negative impact on small investors, the very people the rules were designed to protect.
In an interview on NPR, Jules Gaudreau, president of the National Association of Insurance and Financial Advisors said: “… it forces…this massive degree of disclosure and having contracts with clients before they even begin their relationship. You can imagine that regulations that make it very, very difficult for advisers to have an unfettered relationship with their consumers could push some advisers away from small and moderate-income investors.”
“The core rule will still be a net negative for traditional asset managers. It will encourage more money to flow into passives, ETFs and low-cost funds, which is not good for traditional asset management profitability,” said Craig Siegenthaler, an analyst at Credit Suisse Group AG, in the Wall Street Journal.
Some large institutional investment firms took a wait-and-see stance, applauding the Department of Labor for toning down some of the requirements in earlier drafts.
Reaction in Congress was typically partisan.
In contrast, the response from consumer advocates was overwhelmingly positive, as reflected in comments like these:
“I think it has the potential to be huge and game-changing.”
—Knut A. Rostad, president of the Institute for the Fiduciary Standard (from MarketWatch)
“It is a really big deal. Revolutionary, even.”
—Barbara Roper, director of investor protection at the Consumer Federation of America (from the New York Times)
“Overall, we think it’s a very good day for consumers. We know how important retirement security is to our members. They have tremendous economic anxiety and the step that is being taken today is going to relieve them of that anxiety. They can know they are getting advice that is the best for them and not for the person selling them their products.” — Nancy LeaMond, executive vice president at AARP (from the WSJ)
What do you think? Should financial advisors be required to offer solutions that serve their clients’ best interests? You know where we stand on this issue. We stand with you.