President Donald Trump’s move to
roll back an Obama-era retirement-savings rule leaves many retirement investors
wondering what the action means for their nest eggs. The so-called fiduciary
rule, which was unveiled by the Labor Department last spring and is due to take
effect in April, aims to hold brokers and financial advisers who work with
tax-advantaged retirement savings to a fiduciary standard as opposed to the
previous suitability standard.
Under the fiduciary standard,
advisers overseeing about $3 trillion in U.S. retirement savings would be
required to work in their clients’ best interest and generally avoid the
conflicts that can arise with commission-based compensation.
Here are answers to questions
that individual investors may be asking:
*Where does the rule stand now?
For now, the fiduciary rule is
under review and possibly won’t take effect, at least as originally planned, in
April. Mr. Trump, in a memorandum, directed the Labor Department to study the
rule’s impact and rescind or revise it if it isn’t consistent with
administration’s regulatory principles, which were laid out in a separate
executive order, that “empower Americans to make independent financial
decisions and informed choices in the market place, save for retirement, and build
individual wealth.”
*What does the rule mean for retirement savers?
It depends upon whom you ask.
Proponents of the rule say it
would eliminate incentives that led brokers to give conflicted advice. The
Obama administration has said such conflicted advice costs American families
$17 billion a year and pushes down annual returns on their retirement savings
by a percentage point.
Many financial-industry leaders
have said those figures are inflated. Consultancy AT Kearney projected that the
rule would result inasmuch as $20 billion in lost revenue for the industry,
about 7% of total revenue in 2015.
Brokers who work under the
suitability standard are required to make recommendations that are suitable for
their clients, not those that are in their best interest. Some brokers make
recommendations that pay them the biggest commissions rather than those that
are best for their clients, proponents of the rule say.
But some believe the rule would
prove harmful to retirement investors with small accounts.
“It risks reducing access to
advice and has an infantilizing view of American investors,” says Thaya Brook
Knight, associate director of financial regulation studies at the Cato
Institute, a libertarian think tank. “The biggest risk is that the cost of compliance
in particular for a broker who typically works on commission would be so great
that they would just stop offering advice” to retirement savers without large
accounts, she says.
Investors are capable of
understanding the conflicts brokers face, Ms. Brook Knight says.
*Would the rule’s delay or death mean the end to the fiduciary
standard?
Not likely.
Over the past few years, more
financial advisers have voluntarily adopted fee-only compensation models—for
example, charging a percentage of a clients’ assets under management—rather
than accepting commissions.
Many brokerage firms also see
benefits in embracing the fiduciary model and are moving in that direction. In
preparation for the fiduciary rule’s implementation, many brokerages have made
changes to fee structures and spent millions of dollars to comply. Many say
they will continue to move forward with embracing the fiduciary standard
regardless of what happens going forward.
Merrill Lynch, which has more
than $2 trillion in client assets, has said it would end commission-based
retirement accounts and charge a fee based on a percentage of assets even if
the rule doesn’t survive.
Other brokerages, such as Morgan
Stanley, Wells Fargo & Co. and LPL Financial Holdings Inc., haven’t
eliminated commissions as an option for retirement savers, but they are moving
ahead with other changes. Morgan Stanley has told its brokers it will move
ahead with changes to product pricing, such as lowering the price of
commissions tied to stocks and exchange-traded funds. Wells Fargo plans to go
forward with heightened oversight of retirement accounts, people familiar with
the bank’s strategy previously said. And LPL has implemented lower account
minimums on fee-based accounts and other pricing changes.
*How can investors protect themselves without a fiduciary rule?
Investors should ask if their
adviser is a fiduciary, required by law to act in their best interest. All
registered investment advisers, who charge fees for their advice, are
fiduciaries.
“The single most important thing
investors can and should do if [the rule] is repealed is make sure they’re
getting their advice from a fiduciary adviser, and not a salesperson
masquerading as a financial adviser,” says Barbara Roper, director of investor
protection at the Consumer Federation of America. “It’s really hard to do
because they all market themselves as financial advisers; legally, they are
salespersons, and they are fighting very hard for their right to profit at
their customers’ expense.”
Additionally, investors should
ask their advisers how they are paid, Ms. Roper says. She suggests asking
whether advisers get paid more to recommend some products rather than others,
why they believe a certain investment option is best and whether it is in the
clients’ best interest.
“Try on an individual level to
re-create the protections that the regulation would have put in place,” she
says. “Or you can go to a firm that says they’re moving forward with putting in
place a fiduciary standard and reward them.”
*What effect would the death of the fiduciary rule have on so-called
robo advisers and low-cost funds?
Many advisory firms are still
rolling out robo advisers, which were meant, in part, to help comply with the
rule and to offer small retirement savers access to cheap investment advice.
That trend is expected to continue with or without a required fiduciary
standard for those who advise on retirement assets.
Investors should also expect
continued adoption of low-cost index-based exchange-traded funds and mutual
funds even if the fiduciary rule is halted or delayed, says Todd Rosenbluth,
director of ETF and mutual-fund research at CFRA, a financial data and analysis
provider.
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