New rule from Labor Department can vastly affect your retirement savings
Posted April 11, 2016
After several years of stiff opposition, the Labor Department introduced a new rule Wednesday that requires financial professionals to accept fiduciary responsibility when managing retirement investments.
This means that advisers will have to put their clients' best interest before their own.
What! Your financial adviser didn't have to act in your best interest before now?
Up until now, advisers only had to follow what's called the Suitability Standard, which means, according to the U.S. Securities and Exchange Commission, that brokers have a "reasonable basis for believing that the recommendation is suitable for you."
In other words, an investment or financial product can't be ill-advised in relation to your income, financial goals and risk tolerance, but it doesn't necessarily have to be the best option. This opens the door for advisers to sell products that earn them a greater commission or bury hidden fees in the fine print.
And the losses from financial institutions acting in the interest of their own profits isn't small either. According to the White House Council of Economic Advisers, backdoor payments and hidden fees lead to a rate of return for investors that's 1 percent lower. While that doesn't sound like much, invested over 35 years it could reduce your overall retirement savings by over 25 percent.
The White House estimates that working and middle-class families lose $17 billion per year from advisers not acting as fiduciaries, but financial institutions have argued that the figure is highly inflated.
The Labor Department maintains that the aim of the new fiduciary rule will "level the playing field" and make sure middle-class people are rewarded for their decades of hard work when they arrive at retirement; however, some critics of the rule are skeptical of the outcome.
In fact, one of the rule's staunchest opponents, House Speaker Paul Ryan, R-Wisconsin, argues that the fiduciary rule will actually hurt the middle class.
"The intent of making sure people get sound advice and conflicts of interest (disclosures) is a good idea," Ryan said in a blog post. "This rule, however, is such overkill it is destined to put people out of business and making it harder for middle-class investors to get sound financial advice.”
Ryan explains that with these new regulations comes more paperwork and scrutiny, which has the potential to raise the costs of financial services considerably. This, in turn, may put financial advisement out of reach for middle-class and lower-income families.
“Saving for the future is daunting enough without Washington trying to make it harder," Ryan said in a press release Wednesday, shortly after the Labor Department's announcement. "We will continue to look at every avenue to protect middle-class families and small businesses from government overreach.”
Ryan is not alone in his opposition to the fiduciary rule. Many financial institutions, mutual funds and independent brokers have fought the rule since it was first introduced in 2010, and now are concerned for the health of their business.
MarketWatch retirement columnist Robert Powell, however, says that critics of the rule may be overreacting.
In fact, Powell said, "investors (and the good advisers) here in the U.S. have something to look forward to when the Labor Department’s fiduciary rule becomes the rule of the land," in April 2017.
If the U.S. follows the pattern when a similar rule passed in the U.K. in 2013, Powell said, within three years financial institutions should see an increase in the number of financial advisers, higher profits and higher-quality financial advice.
Powell does acknowledge Ryan's fear that the price of financial advisement could rise beyond the reach of the middle class as firms tend to focus on accounts with larger balances.
But there is a solution for lower-income investors: robo-advisement.
Firms are already offering robo-advisement services in the U.S., Powell says, making advice affordable and accessible to those who need it most as well as those who are not being served well or at all by the financial planning industry.
And as an added bonus, it will be easier and less expensive to regulate and monitor fiduciary responsibility for electronic advisement systems.
"The clear winner in both countries is certain to be investors and consumers," Powell writes. "And the sky — despite claims to the contrary by those in the advice/product industry/profession — will not fall."