3 June 2020

U.S. Tightens Broker Standards for Retirement Advice

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The Obama administration proposed long-expected rules toughening oversight of financial professionals paid to give retirement advice. The move is likely to intensify pushback from Wall Street groups, who have said the rules’ costs could reduce options for mom-and-pop investors. Under the proposal, released by the Labor Department on Tuesday, brokers would have to put clients’ interests ahead of personal gain when they make recommendations for retirement accounts. At present, brokers’ recommendations only have to be “suitable,” a weaker standard that critics have said permits products with high fees that slowly erode returns.

The rules come as individual savers have become responsible for their own retirement security as traditional pensions have largely disappeared in favor of individual retirement accounts and 401(k) plans. Such products either didn’t exist or were brand new when the department wrote its rules for retirement advice 40 years ago but now contain about $11 trillion in assets.

Labor Secretary Tom Perez said the rules would allow brokerage firms to continue to set their own compensation practices, including commission-based transactions that are a feature of the market. The firm and the individual adviser would have to sign a contract with clients promising to act in their best interests and disclose potential conflicts to charge commissions.

A bipartisan group of lawmakers, in addition to Wall Street groups like the Securities Industry and Financial Markets Association, warned ahead of Tuesday’s announcement that the rules may make it uneconomical for brokers to serve lower-balance accounts such as those of mom-and-pop investors. The White House said investors lose as much as $17 billion annually because of excessive fees and conflicted advice. The industry disputes those figures.

The Labor Department’s proposal would close what critics view as loopholes in existing law allowing brokers to skirt a fiduciary duty when they only provide one-time, as opposed to ongoing, advice or by saying in fine print their recommendations aren’t the primary basis of an investor’s decision to buy an investment product.

In 2013, about $353 billion was rolled over from workplace defined-contribution plans to IRAs, according to an estimate by research firm Cerulli Associates. The Boston firm expects rollovers to continue increasing to about $546 billion in 2019.

Supporters said the rules are unlikely to restrict access to high-quality retirement advice. Micah Hauptman, financial-services counsel at advocacy group the Consumer Federation of America, said online “robo advisers” already offer high-quality advice to middle-income savers and adhere to a fiduciary requirement.

Still, the proposal is a blow to some industry groups and lawmakers who had pushed the Securities and Exchange Commission to move first in floating a broader fiduciary rule that would apply whenever brokers recommend stocks or other securities to clients, not just when they give retirement advice. Industry groups see the SEC as generally more responsive to their concerns.

SEC Chairman Mary Jo White embraced the idea of a broad fiduciary rule last month but said her agency is only in the early stages of crafting its measure. The Labor Department rules are more flexible than a 2010 proposal the department withdrew amid an outcry from Wall Street, which complained it would have barred many routine payments to brokers, including commissions.

Click here to access the full article on The Wall Street Journal. 

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