Some financial advisors did not get a lot of love from the White House bully pulpit on Tuesday when President Joe Biden rolled out the Department of Labor’s newly proposed fiduciary rule governing retirement accounts.
The proposed rule would “close loopholes” and impose a requirement that a wider swath of financial advisors must put their clients interests ahead of commissions or face penalties and restitution requirements, Biden explained.
“Some advisors and brokers steer their clients toward certain investments not because it’s the best interest of the client [but] because it means the best payout for the broker,” Biden told an audience assembled in the White House’s State Dining room.
“I get it, understand it. But I just want you to know we’re watching. To put it colloquially,” Biden said as the audience laughed and applauded.
Those brokers were “scamming Americans out of hard-earned money,” Biden added. “People should be able to trust that when they get advice from a so-called expert, they’re getting real help, not getting ripped off. … [W]hen a person pays for trusted advice and it comes with a hidden cost, that’s what I call a junk fee. And I think it’s wrong.”
The proposal covers advisors who make even a one-time recommendation related to investors’ retirement savings. It would apply a fiduciary standard for defined-benefit pension plans to recommendations from advisors, such as rolling over assets from a workplace retirement plan to an Individual Retirement Account, according to a fact sheet released by DOL in tandem with the White House briefing.
The same standard would also apply if the financial professional recommends investments or receives any compensation, as well as if the investors “would reasonably expect” to receive advice guided by their best interests, according to the DOL fact sheet.
“Amounts held in workplace retirement accounts often represent the largest savings an individual has, and financial services providers often have a strong economic incentive to recommend that investors roll money into one of their institutions’ IRAs or annuities,” the DOL release states.
The Biden administration is casting the policy change as a redo of an almost 50-year regulatory scheme under the Employee Retirement Income Security Act of 1974 governing retirement accounts and comes as 401(k)s have largely replaced pension plans. Former President Barack Obama had proposed a wider-ranging fiduciary rule in 2016 that would have given investors a private right of action, but it was struck down by an appeals court in 2018.
“Under the nearly 50-year-old rule, a financial services provider is an investment advice fiduciary only if, among other things, the advice is provided on a ‘regular basis’ and there is a ‘a mutual agreement, arrangement, or understanding’ that the advice will serve as ‘a primary basis for investment decisions,’” the DOL statement noted.
With this week’s proposal, the definition of fiduciary “is intended to extend to the type of interactions retirement investors commonly have in the financial services marketplace with trusted advisers,” the DOL statement adds.
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The proposal also adds more regulatory heft for independent insurance agents when they recommend rollovers, specifically to purchase annuities. Biden cited annuities as an area ripe for conflicts of interest and joked, “Many families …don’t know ‘annuity’ from ‘sannuity.’”
Investor advocates welcomed the proposal, while the brokerage industry representatives expressed concerns about its breadth.
The change will mean advisors on retirement accounts can “no longer hide junk fees” or conflicts of interest, said [Peiffer Wolf Founding Partner] Joseph Peiffer, the incoming president of the Public Investors Advocate Bar Association.
“They must put retirees first,” Peiffer wrote. “Retirees expect loyalty and prudence from their financial advisers. The DOL Rule brings the law into line with retiree’s expectations. Big firms like [Charles] Schwab and Fidelity [Investments] will now have the common sense duty to put retirees first.”
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Full Story: AdvisorHub November 1, 2023
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