A Blog by Jonathan Low


Apr 19, 2015

Wall Street Objects to Proposed Rule That Puts Client Interest Ahead of Brokers' Personal Gain

Well, on the bright side, it's always good to know where you stand with your financial advisor. JL

Andrew Ackerman reports in the Wall Street Journal:

The Obama administration proposed long-expected rules under (which) brokers would have to put clients’ interests ahead of personal gain when they make recommendations for retirement accounts. At present, brokers’ recommendations only have to be “suitable.”

The Obama administration proposed long-expected rules toughening oversight of financial professionals paid to give retirement advice. The move is likely to intensify pushback from Wall Street groups, who have said the rules’ costs could reduce options for mom-and-pop investors.
Under the proposal, released by the Labor Department on Tuesday, brokers would have to put clients’ interests ahead of personal gain when they make recommendations for retirement accounts. At present, brokers’ recommendations only have to be “suitable,” a weaker standard that critics have said permits products with high fees that slowly erode returns.
The rules come as individual savers have become responsible for their own retirement security as traditional pensions have largely disappeared in favor of individual retirement accounts and 401(k) plans. Such products either didn’t exist or were brand new when the department wrote its rules for retirement advice 40 years ago but now contain about $11 trillion in assets.
Labor Secretary Tom Perez said the rules would allow brokerage firms to continue to set their own compensation practices, including commission-based transactions that are a feature of the market. The firm and the individual adviser would have to sign a contract with clients promising to act in their best interests and disclose potential conflicts to charge commissions.
“This rule is intended to provide guardrails but not straitjackets, so we know consumers are getting advice that is in their best interest,” Mr. Perez said in a call with reporters.
A bipartisan group of lawmakers, in addition to Wall Street groups like the Securities Industry and Financial Markets Association, warned ahead of Tuesday’s announcement that the rules may make it uneconomical for brokers to serve lower-balance accounts such as those of mom-and-pop investors. The White House said investors lose as much as $17 billion annually because of excessive fees and conflicted advice. The industry disputes those figures.
Kenneth Bentsen Jr., president and chief executive of the Securities Industry and Financial Markets Association, said in a statement the group is reviewing the proposal to ensure it “doesn’t unnecessarily reduce access to education or raise costs, particularly for low and middle income savers.”
The Labor Department’s proposal would close what critics view as loopholes in existing law allowing brokers to skirt a fiduciary duty when they only provide one-time, as opposed to ongoing, advice or by saying in fine print their recommendations aren’t the primary basis of an investor’s decision to buy an investment product.
It also targets advisers who make recommendations to individuals looking to roll over 401(k) accounts into individual retirement accounts, or IRAs, upon leaving a job or retiring. Rollovers are among the single biggest investment decisions many workers will make, involving a nest egg they have been accumulating for decades. The administration of George W. Bush excluded such recommendations from the definition of “advice” in 2005. Under the new rules, brokers could still roll over investor funds but would have to sign a contract promising to maintain their clients’ best interests, Mr. Perez said.
In 2013, about $353 billion was rolled over from workplace defined-contribution plans to IRAs, according to an estimate by research firm Cerulli Associates. The Boston firm expects rollovers to continue increasing to about $546 billion in 2019.
Tuesday’s announcement comes in the wake of President Barack Obama’s February endorsement of the rules. Still, it will take several months for the Labor Department to collect public feedback before it can move to implement them.
Supporters said the rules are unlikely to restrict access to high-quality retirement advice. Micah Hauptman, financial-services counsel at advocacy group the Consumer Federation of America, said online “robo advisers” already offer high-quality advice to middle-income savers and adhere to a fiduciary requirement.
Some top brokerage officials have expressed reluctance to fight the Labor Department over the rules. John Thiel, head of Merrill Lynch Wealth Management, said Wall Street should work “in a constructive and collaborative manner” with regulators, speaking last week at a conference. He didn’t mention the Labor Department by name but was referring to the fiduciary rule.
Still, the proposal is a blow to some industry groups and lawmakers who had pushed the Securities and Exchange Commission to move first in floating a broader fiduciary rule that would apply whenever brokers recommend stocks or other securities to clients, not just when they give retirement advice. Industry groups see the SEC as generally more responsive to their concerns.
SEC Chairman Mary Jo White embraced the idea of a broad fiduciary rule last month but said her agency is only in the early stages of crafting its measure.
The Labor Department rules are more flexible than a 2010 proposal the department withdrew amid an outcry from Wall Street, which complained it would have barred many routine payments to brokers, including commissions.


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