Stricter rules unveiled for brokers giving retirement advice

AP News
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Posted: Apr 06, 2016 5:54 PM

WASHINGTON (AP) — The Obama administration acted Wednesday to require that brokers who recommend investments for retirement savers meet a stricter standard that now applies to registered advisers: They must act as "fiduciaries" — trustees who are obligated to put their clients' best interests above all.

The action, in rules issued by the Labor Department, could shake up how Americans' retirement investments are handled by brokers. The anticipated release of the rules had been the target of heated lobbying campaigns from both the financial industry and consumer advocates.

"This is a huge win for the middle class," Labor Secretary Thomas Perez said in a conference call with reporters. "We are putting in place a fundamental principle of consumer protection."

The rules will be phased in starting a year from now. Full compliance will be required by January 2018.

The change could alter the types of investments — from stocks and bonds to annuities and real estate funds — that brokers recommend for people's retirement accounts. Their recommendations may soon shift away from riskier or high-commission investments.

And brokers will have to disclose any conflict of interest related to a financial product — like commanding a high fee for recommending it — that would prevent them from putting a client's interests first.

Americans increasingly seek advice to help navigate their options for retirement, college savings and more. Many professionals provide investment guidance, but not all are required to disclose potential conflicts of interest.

The management of hundreds of billions in retirement accounts like 401(k)s and Individual Retirement Accounts could be affected. About $4.5 trillion were in 401(k) retirement accounts as of Sept. 30, plus $2 trillion in other defined-contribution plans such as federal employees' plans and $7.3 trillion in IRAs, according to the Investment Company Institute, an industry group.

Critics of the current system say investors lose billions a year because of brokers' conflicts of interest. The White House estimates the loss at $17 billion annually.

Regulators say problems often arise when people who are retiring or leaving a company "roll over" their employer-based 401(k) account into an individual retirement account. A broker they hire to make that shift might persuade them to move their money into a variable annuity or other investment that could be risky, expensive or difficult to cash out.

The Consumer Federation of America called the government action "a historic win for consumers."

Most of the industry groups that opposed stricter requirements were reviewing the 200-page Labor Department document and hadn't made pronouncements.

Some financial companies and groups are considering taking the government to court over the new rules.

The financial industry warns that the new requirements for brokers will likely reduce investors' choices of financial products and could cause brokers to abandon retirement savers with smaller accounts.

Perez said that in drafting the final rules, his department considered many of the industry's concerns and made revisions to accommodate them. The period for the rules to begin taking effect, for example, was extended from eight months as originally proposed to one year.

At ground level, the new system will force financial advisers to adapt, consultants J.D. Power says. It joins the rise of new technology such as robo-advisers — automated wealth-management services — as factors that are "causing more investors to question the value they are getting out of their advisers," J.D. Power said.

"Full-service firms will need to adapt to make a clearer case for the value they provide versus lower-cost alternatives," it said.

Cynthia Meyer, a certified financial planner based in Gladstone, New Jersey, says she expects the stricter rules "to create some long-term downward pressure on fees" paid by investors.

She said she also hopes the action will "spur a movement" toward establishing fiduciary standards for all investments, beyond retirement accounts. Meyer's firm, Financial Finesse, develops "financial wellness" programs as a workplace benefit for employees.

Already, retail investment firm LPL Financial announced last month that in anticipation of the stricter rules, it planned to reduce fees for advising clients, in some cases by nearly 30 percent. The firm also is lowering the minimum required account balance for some clients to $10,000 from $15,000.

A strict fiduciary rule might have helped some investors who have lost retirement savings in recent years.

One of them, Susan Bernardo, 58, says about seven years ago, her broker put her money into energy and real estate partnerships without explaining the risks or the fat 5 percent commission that brokers typically earn on such deals. The portfolio, once worth $400,000, has plunged to half that.

A widow and single mother from Wantagh, New York, Bernardo is also angry that the broker put money that had been set aside for her then-3-year-old son in variable annuities that he can't touch until turning 59½ — at least without paying steep penalties. Earnings on variable annuities can grow tax-free, but hefty fees kick in if investors withdraw cash before they reach that age.

"Unfortunately, it's a little late for me," Bernardo said of the new rules. "A lot of people have been hurt."

There have been numerous cases in recent years of abuses by brokers of their customers. In 2012, David Lerner Associates was fined $12 million by regulators for putting unsophisticated and elderly investors into risky real estate investment trusts.

And last year, UBS paid $15 million to settle charges that it had failed to supervise a former broker who had put investors into risky Puerto Rican funds.

Both companies neither admitted nor denied wrongdoing.

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AP Business Writer Bernard Condon in New York contributed to this report.

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Video animation explaining the rules: https://youtu.be/YPH1J1DmHvE