The Labor Department announced sweeping rules Wednesday that could transform the financial advice given to people saving for retirement by requiring brokers and advisers to put their clients’ interest first.
The long-awaited “fiduciary rule” would create a new standard for brokers and advisers that is stricter than the current regulations, which require only that brokers recommend products that are “suitable,” even if it might not be the investor’s best option.
At a time when mom-and-pop savers are increasingly being put in charge of their own retirement security, the rule is meant to add a new layer of protection to guard workers from poor or conflicted investment advice.
The rule is meant to improve disclosures and to reduce conflicts of interest, such as cases when a firm is paid by a mutual fund company or other third party for recommending a particular investment.
“This is a huge win for the middle class,” said Thomas Perez, secretary of the Labor Department. “In far too many places and on far too many issues, the rules no longer work for working people.”
Proponents of the rule say it should cut back on cases of retirement savers being steered into complicated and pricey investments, leaving them with more savings in their pockets.
Although the new rule won’t ban commissions, brokers might have to explain why they are recommending a particular product when a less expensive option is available, and they could face scrutiny if they recommend complicated products.
Conflicted investment advice costs savers $17 billion a year, according to an estimate from the White House Council of Economic Advisers.
“Hard workers need every dollar to work for them,” said Sen. Elizabeth Warren, D-Mass., during a press event Wednesday announcing the rule.
It’s too soon to know exactly how the rule will play out, but the change could lead savers to invest more of their money in low-cost index-based funds, analysts say.
Some investment firms also could lower their fees. For instance, LPL Financial said last month that it would allow savers to hold accounts with smaller balances and that it would cut the fees for some funds by up to 30 percent.
“We’re definitely going to see investors that are forced to change how they interact with the investment services industry,” said Michael Wong, an analyst focusing on brokerages and exchanges for Morningstar Inc., a fund research firm.
For some savers, particularly those with small account balances, the new regulations could require them to take on a bigger role in how their money is managed.
Some companies facing higher administrative costs might feel pressure to drop clients with low account balances, say below $50,000, which might no longer be as profitable with fewer commissions. Some firms might try to transfer savers into stripped-down, online-based accounts, where they pay lower fees but also receive less personalized advice.
“We remain concerned that the (Department of Labor’s) rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement,” said Kenneth Bentsen, president and chief executive of the Securities Industry and Financial Markets Association, a trade group for broker dealers and other financial professionals.
The Labor Department says the rule won’t affect people saving through 401(k) plans, which already are subject to fiduciary rules.
