The Obama Administration sent shock waves through the financial services industry when it announced in late February that it would back the Department of Labor’s (DOL) push for tougher fiduciary standards for financial advisors and brokers.
The DOL’s plan, heavily debated by industry stakeholders in recent years, would require brokers to act in a customer’s best interest, which is a stricter measure than the requirement that the product simply be “suitable” for customers that is currently in place.
In remarks to AARP, the president said the current regulations are “out of date, devised in the era when most Americans could count on a traditional pension from employers.”
“Financial advisers absolutely deserve fair compensation,” he said. “But they shouldn’t be able to take advantage of their clients.”
The White House claims that conflicted advice costs working- and middle-class families a total of $17 billion in losses each year, according to National Public Radio. The new rule would prevent financial advisors from steering clients to investments with high costs, hidden fees and low returns.
Certain industry participants and observers, however, fear a rule change would curb compensation for brokers and would limit the types of investment products investors can afford, Reuters reports. Fierce lobbying by the industry forced the Labor Department to scrap its original proposal a few years ago.
“This re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers,” Ken Bentsen, president of the Securities Industry and Financial Markets Association, which represents banks and assets managers, told the news service.
Critics appear to have Republican backing. Reuters adds that Daniel Gallagher, a Republican member of the Securities and Exchange Commission, chided the White House last week for circulating baseless “propaganda” to rally support for the change.
In December, Senator Orrin Hatch, R-Utah, told reporters at the Financial Services Roundtable in Washington that as incoming chairman of the Senate Finance Committee he plans to reintroduce his Secure Annuities for Employee Retirement (SAFE) Act, which would block the Department of Labor from writing fiduciary rules for individual retirement accounts.
The SAFE Act takes action to stop the DOL from “unilaterally over-regulating 401(k) plans and IRAs,” according to Hatch. “The legislation restores jurisdiction over the fiduciary rules in the Tax Code to the Treasury Department. In addition, Treasury will consult with the Securities and Exchange Commission in prescribing rules relating to the professional standard of care owed by brokers and investment advisors to IRA investors. This legislation is consistent with the bipartisan and bicameral effort to convince the Labor Secretary to preserve access to professional investment advice for middle class investors.”
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
