In its desire to protect retirement savers better, the U.S. Department of Labor last year ruled all financial professionals working with retirement plans, or providing retirement planning advice, would be recognized as fiduciaries by the federal agency.
However, immediately after taking office, President Donald Trump called for an examination of the Conflict-of-Interest Rule—or fiduciary rule—which the Obama Administration sought to impose starting April 10, the Department of Labor announced recently.
The conflict of interest rule says that advisers who are paid to make recommendations about retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts, will be treated as fiduciaries. The federal agency adopted the conflict-of-interest rule with the intention of protecting retirement investors by requiring advisers to follow a fiduciary standard, providing advice that’s in an investor’s best interest.
“Financial companies often pay advisers more to promote certain products than to recommend what is best for their customers,” the Labor Department says. “That incentive creates what is known as a conflict of interest. And conflicts of interests sometimes can cause advisers to give bad advice.”
Don Morgan, who co-owns Spokane Valley-based Independent Wealth Connections and is one of three advisers at the firm, thinks in some cases investors will suffer.
Morgan cites Bank of America Merrill Lynch’s decision last October to stop offering new, advised commission-based IRAs to customers at the beginning of this year as a response to the conflict-of-interest rule.
“In my opinion, this is the Affordable Care Act for everybody’s IRA,” says Morgan, who runs his firm with his wife, Violet Morgan. “Almost everyone I know in the industry acts in the client’s best interest,” he says of adherence to the conflict rule. “This is an attempt to solve a problem that isn’t there.”
Morgan says he’s concerned that commissioned-based advisers will suffer financially, and also is worried that young advisers might leave the profession altogether due to the increased regulations reducing opportunities for compensation.
As for customers, looking long term, Morgan also thinks investors will be left with fewer investment options from firms and fewer advisers to choose from.
Kelly Ruggles, president of American Reliance Group Inc., of Spokane, agrees with Morgan’s assessment of a decline in advisers and insurance agents if the rule is implemented.
Ruggles, a fiduciary for 25 years, says a majority of advisers and insurance agents in the industry are above 56 years of age. He envisions an exodus of advisers and insurance agents in the field who won’t be replaced by young prospects.
“I think the unintended consequences of the rule is that a lot of people are going to be going bye-bye,” Ruggles says.
He says he’s not in favor of more regulations, but that he favors the fiduciary rule because of the consumer protections offered.
Ruggles says much of the general public assumes that all financial advisers have to inform investors of any potential conflicts of interest as they guide them in their investment advice.
“That’s just not true. The DOL ruling is a good ruling,” Ruggles says.
Financial advisers earn their money through three basic compensation models—commissions, fee-based, and fee-only. Under the commissions model, the advisor is paid for the sale of investments, insurance, or other financial products, with the money coming from the firm that provides the products, which allows for potential conflicts of interest.
Under the fee-based model, the adviser charges a fee for putting together a financial plan for a client, and also might reap income through the sale of commissioned products if the client chooses to implement the financial plan recommendations.
Under fee-only, the adviser charges a fee for the services rendered, and the fee can be a one-time payment or ongoing, depending on the nature of the relationship and the services rendered. The fees may be hourly or based on a percentage of the client’s assets under advisement.
The conflict of interest rule pertains to advisers who are paid directly by investors or paid indirectly through commissions or other payments they may receive from third parties.
The Labor Department says it expects that those who work on commission, such as brokers and insurance agents, to be impacted the most if the Trump administration upholds the rule.
Ryan Moore, a Deer Park-based financial adviser with Edward D. Jones & Co., says that company began transitioning advisers to fiduciaries last year.
Moore says advisers are still paid a commission on nonretirement accounts. However, managing retirement accounts now pays advisers in a manner that is analogous to a salary structure.
Moore says implementation of the conflict rule has “put an enormous crunch” on normal business activities. However, he says Edward Jones has used the opportunity to explore new investment approaches for its clients.
“It’s a shame that people take advantage of other people,” Moore says of the impetus for the Labor Department’s enactment of the new rule. “But what this has done is given us some new tools for improved client service.”
As part of its rationale for implementing the rule, the Labor Department last year cited data from the President’s Council of Economic Advisers that conflicting financial advice is costing America’s working families roughly $17 billion per year.
The Department of Labor’s definition of a fiduciary requires that advisers act in the best interests of their clients, and put their clients’ interests above their own. Advisers who aren’t fiduciaries currently don’t have to reveal any potential conflict of interest. Fiduciaries are required to disclose all fees and commissions to their clients.
If Trump upholds the rule, fiduciaries would be expanded to include any professional making a recommendation or solicitation and not just providing ongoing advice, the Labor Department says.
It goes on to say, “Over the last few decades, as 401(k) plans and IRAs have become more popular, individual workers, rather than large employers and professional money managers, have become increasingly responsible for managing their retirement investment assets in self-directed IRAs and 401(k) plans.”
The Department of Labor notes that individual investors aren’t investment professionals and commonly depend on advisers to make important investment decisions.
“But these advisers often have strong financial incentives to recommend investments that result in a larger financial benefit to the adviser but may not be in their customer’s best interest,” it says.
While many financial advisers act in their customers’ best interest, not everyone was legally obligated to do so. “This rule levels the playing field, and makes sure that all retirement advisers follow the same standards,” the Labor Department says.
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