The U.S. Department of Labor on Tuesday said it has finalized a fiduciary rule governing retirement accounts that will close loopholes and widen the swath of financial advisors who must put their clients interests ahead of commissions or face penalties and restitution.
The final rule, which takes effect September 23, updates the definition of an investment advice fiduciary under the Employee Retirement Income Security Act and the Internal Revenue Code. When proposed last year, it drew objections from trade associations for the brokerages and other institutions in the securities industry, who argued it would increase regulatory and compliance costs.
The DOL in an announcement on Tuesday said that the final rule and a related prohibited transaction exemption will “require trusted investment advice providers to give prudent, loyal, honest advice free from overcharges.”
“These fiduciaries must adhere to high standards of care and loyalty when they recommend investments and avoid recommendations that favor the investment advice providers’ interests — financial or otherwise — at the retirement savers’ expense,” the DOL added.
The rule as proposed in November would apply a fiduciary standard to recommendations from advisors such as rolling over assets from a workplace retirement plan to an Individual Retirement Account. It would also likely result in additional scrutiny for some high-fee annuity products.
“America’s workers and their families rely on investment professionals for guidance as they save for retirement,” DOL Acting Secretary Julie Su said in the announcement. “This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest.”
When President Joe Biden rolled out the rule last year, he described it as closing “loopholes,” and said, “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. I get it, understand it. But I just want you to know we’re watching.”
The final rule could still face court challenges or congressional scrutiny. The Financial Services Institute, a trade group of independent broker-dealers, said in a statement that it is reviewing the rule and raised an issue with the “abnormally rapid” pace at which it was issued following a comment period last year.
“We remain concerned that the final rule will have a negative impact on Main Street Americans’ access to financial advice as they attempt [to] save for a dignified retirement,” FSI said in a statement.
The Public Investors Advocate Bar Association (PIABA), a member organization for plaintiff lawyers representing investors, issued a statement welcoming the new rule, noting that studies have said the existing loophole has cost retirement savers and their families $17 billion annually.
“Financial advisors are not going to go extinct,” Joseph Peiffer, president of PIABA and founding partner of the law firm Peiffer Wolf Carr Kane Conway & Wise, said in a written statement. “Frankly, it’s an insult to the intelligence of hard-working Americans when advisors claim their jobs are threatened by the prospect of providing the unconflicted advice they know their clients already expect.”
Source: Advisor Hub April 24 2024
