The Department of Labor (DOL) is trying to push through its conflict of interest rule before the year ends. Many expect it to go into effect next year. The new rule, which is really a reboot of the failed 2010 Securities and Exchange Commission (SEC) motion, will require any financial advisor paid for giving advice on retirement accounts to put their clients’ best interests before their own.
The conflict of interest rule comes straight from the top. President Obama charged the DOL with submitting the rule to protect the retirement savings of the middle class earlier this year.[ad#Google Adsense 336×280-IA]By the way, the changes bypass the SEC and do not require congressional approval.
The DOL is introducing the proposed rule under the authority granted it by the Employee Retirement Income Security Act of 1974.
Basically, it replaces the suitability standard brokers are supposed to follow today.
Broker-recommended investments must be suitable for their clients’ objectives.
However, under the suitability rule, brokers may still suggest products that charge higher fees and give them a higher payout.
In other words, they don’t necessarily have to act in their clients’ best interests.
The conflict of interest rule would expand the coverage of “fiduciary duty” from registered investment advisors (RIAs) to most financial advisors; the DOL’s primary target is brokers. Like lawyers and doctors, RIAs are already required to act in their clients’ best interests. Most of them charge fees on assets under management and cannot be incentivized to steer money into investment products with fatter payouts.
Don’t get me wrong, the DOL has good intentions. It wants to protect investors by ensuring that every financial professional works in the best interest of their clients.
But you know what they say about the road to hell… and this rule could change your IRA as you know it.
Right now, individual investors may work with the financial advisor of their choice. They can choose a broker, an RIA or a robo-advisor, or they can even manage their retirement savings on their own. Investors may also choose the fee structure of their choice: commission-based, fee-based or a self-directed platform.
But under the new proposal, the DOL may take away those choices. It may also limit the types of investments you can place in an account. The rule could force investors into fee-based accounts, making them pay more for similar levels of professional guidance.
If you like your doctor, you can keep your doctor. Oh, wait… no you can’t.
Most of us remember hearing this before the Affordable Care Act was enacted. Unfortunately, many Americans found out the hard way that the government couldn’t keep that promise.
Investors may live through a similar “Groundhog Day” if the conflict of interest rule is enacted. We just have to look across the pond to our friends in the United Kingdom to find out what happens when government sticks its nose in your retirement account.
No financial advice for you.
Back in 2013, the U.K. enacted a similar regulation. In response, many advisors stopped servicing small retail accounts. An estimated 11 million investors were priced out of the market. They were fired by their brokers. The risk associated with ensuring and defending fiduciary conduct was just too high compared to the maximum fees the brokers could earn managing smaller accounts.
The rule hurt the very people it was supposed to help: middle-class investors. Many were left stranded with their accounts and had no idea what to do with them. It could happen here.
Always be prepared.
There is no such thing as a uniform “best interest” for everybody. Lawyers, not investors, will be the only winners if and when the conflict of interest rule is enacted. I’m sure they are salivating just thinking about the billable hours they will be able to rack up arguing the definition of “best interest.”
The consequences for investors remain to be seen. But only you know what is best for you and your retirement accounts. So rather than run the risk of having your account put out to pasture, take the bull by the horns.
Investors controlling their own accounts have nothing to worry about in terms of the conflict of interest rule. Sure, there may be a bit of a learning curve when you begin to manage your own retirement account. But there are many resources, like Wealthy Retirement, out there to help you find your way.
Ultimately, it’s a good bet that relying on a DOL-regulated broker will result in you paying higher fees and seeing lower returns than if you handled your accounts yourself.
And that’s if you can find a broker who will take you.
Source: Wealthy Retirement