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New fiduciary rules: Whose interests come first?

Andrew Osterland, special to

Your broker is about to become a fiduciary — at least when it comes to your retirement accounts — and, depending on whom you ask, that could be a very good or very bad thing.

A new fiduciary standard applying to financial advisors of retirement accounts, including individual retirement accounts, is expected to be finalized by the Department of Labor within the next several months. Even if the Republican-controlled Congress passes legislation to halt the DOL rule-making process, President Obama will veto it, enabling the biggest changes to the Employee Retirement Income Security Act (ERISA) since it was drafted 40 years ago.

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"The ERISA fiduciary definition goes back to 1974, when there were no 401(k) plans and IRAs were still small," said Kevin Keller, CEO of the Certified Financial Planner Board of Standards. "The world has changed dramatically since then. It's time to update the rules."

Currently, registered investment advisors regulated by the Securities and Exchange Commission or state securities regulators are already held to a fiduciary standard of conduct under which they must act in their clients' best interests. That means putting the client's needs before their own, and if they don't, they can be sued by investors.

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Securities brokers, however, are regulated by the Financial Industry Regulatory Authority under a "suitability" standard. The investments they recommend must be suitable for investors, but they are not required by law to act in their clients' best interests. Any disputes between brokers and their clients are settled through an arbitration process.

"The new rule represents long-overdue consumer protection," said Geoffrey Brown, CEO of the National Association of Personal Financial Advisors, which also supports the DOL proposal.

"It's time for this," he said.

Our biggest concerns are reduced access to advice for the lower end of the investor spectrum and higher costs for individuals.
Andy Blocker
executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association

Opponents of the proposed rule — predominantly organizations representing brokerage and asset management firms — contend that it will hurt many of the investors it is intended to protect.

"Our biggest concerns are reduced access to advice for the lower end of the investor spectrum and higher costs for individuals," said Andy Blocker, executive vice president of public policy and advocacy at the Securities Industry and Financial Markets Association (SIFMA). "Either investors will be put in an account where they pay more, or they'll get less service.

"As the rule is constructed, it's unfeasible to serve the market profitably on the lower end," he added.

Blocker said that the DOL rules are overly complex, have onerous disclosure requirements for firms and will create new legal liabilities for advisors to retirement accounts.

"These restrictions will upend the marketplace," he said.

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There is no question that the DOL proposals will force major changes on broker-dealers currently managing 401(k) plans and advising on individual retirement accounts. The new systems required to monitor advisors and produce better disclosures for clients will cost a lot of money — some of which will almost certainly be passed along to consumers.

"In the short term, costs will increase, but in the medium- to long term, there will be more transparency in the market, and prices may start to come down in time," said Marcia Wagner, head of the Wagner Law Group, which focuses on ERISA law and employee benefits.

"Like every major regulatory project, there are positive and negative aspects to this," Wagner said.

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The DOL has had an extended comment period and has held hearings on its re-proposed rule — it initially tabled the rule in 2010 — and is expected to make significant changes to the proposal. Keller of the Certified Financial Planner Board of Standards expects the department will relax some of the disclosure requirements and modify the rules about communications between advisors and prospective clients and likely give firms more time to comply with the rule.

He also expects it will change some of the details around the "best interest contract" (BIC) exemption, which is the biggest change to the DOL's original proposal. Advisors receiving commissions or other compensation that might cause conflicts with their clients' interests can receive an exemption as long as they adequately disclose and manage those conflicts.

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Blocker at SIFMA said the BIC is unworkable as is, and if the DOL plans to make substantial changes to it, it should put those changes out for public comment and hearing again.

So will individual investors with small retirement accounts be left to manage for themselves? Possibly. Wagner expects that some firms will decide to exit the marketplace rather than revamp their operations.

However, there will be plenty of advisors willing to fill the breach if firms choose to exit the business. Retirement plan sponsors and participants may need to do some legwork, but there will be options.

"People may need to search out the experts in 401(k) plans and IRA rollovers," she said. "If an advisor says they can no longer handle the account, find someone who can. They are out there."

While the DOL proposal will significantly change the ground rules for many advisors currently serving retirement accounts, it won't be the massive upheaval that opponents of the rule suggest, said Keller.

In 2007, when the CFP board decided to require that CFPs follow the fiduciary standard, industry opponents made similar gloomy predictions about firms and advisors abandoning their certification. Since then, the number of advisors with the CFP certification has risen by a third.

"This will change the way firms operate, but they will figure out how to accommodate the new requirements," said Keller. "There are costs involved, but the benefit to consumers of having their interests put first far outweigh the expenses."

Additionally, Secretary of Labor Thomas Perez unveiled on Monday the DOL's proposed rule to clarify ERISA's application to state-run IRA programs. The proposed regulation includes a rule modifying the payroll-deduction safe harbor to allow for an ERISA exemption for auto-enroll payroll-deduction IRAs offered by states as a default program where there is a requirement for an employer to have a plan.

— By Andrew Osterland, special to