Battle Continues Over Fiduciary Rule for Retirement Investments
Fight centers over whether proposed regulatory proposal is truly in retirees’ best interest
PHOTO: CHRISTINE GLADE/GETTY IMAGES
Of all the regulatory battles in Washington, one in particular could affect the retirement savings of millions of investors for years to come.
At the center of the conflict is a proposal by the Department of Labor that it says offers a new level of protection for investors in their dealings with brokers and other financial professionals who give advice on retirement accounts and defined-benefit plans. The proposal would require these professionals to always act in the best interest of their clients. The so-called best-interest standard is known as a fiduciary duty.
Financial advisers registered with the Securities and Exchange Commission already are held to this standard. But brokers for the most part are held to a standard of “suitability,” which requires them to reasonably believe that any investment recommendation they give is suitable for an investor’s objectives, means and age.
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Consumer advocates say that because of the lack of a fiduciary standard, stock brokerages, insurance firms and other financial-service providers for years have recommended investment products that line their own pockets with fees and commissions instead of giving customers options that could be less expensive and provide better returns for their retirement savings. The fiduciary proposal, these consumer advocates say, would close regulatory loopholes that make such behavior possible.
Reliance on professionals
“As a matter of policy, we have chosen to put the responsibility for saving for retirement on individuals who don’t have the financial sophistication to make sound investment decisions on their own,” says Barbara Roper,director of investor protection at the Consumer Federation of America, a nonprofit in Washington, D.C. “They rely on financial professionals to help them with these decisions, and they desperately need advisers who serve their best interest.”
If adopted, the proposal would have a big impact on large parts of the financial-services industry, particularly brokers and insurance agents who sell retirement products. In addition to affecting product recommendations, it would require that professionals act in clients’ best interest when offering advice on distributions from retirement plans and the investment of assets to be rolled over or distributed from plans or IRAs.
The proposal also would help clarify the advisory landscape for investors who are confused by stockbrokers who call themselves advisers but who needn’t act in their clients’ best interest, backers of the proposal say.
The Labor Department says a review of academic literature provided by the White House Council of Economic Advisers suggests that advice from professionals who have a financial incentive to put investors in a specific product takes a $17 billion bite out of the retirement savings of working- and middle-class families each year. Such conflicts of interest in the mutual-fund segment alone could cost IRA investors more than $210 billion over the next 10 years and nearly $500 billion over the next 20 years, the department says.
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