Labor Department says to Brokers, Change your ways

June 18, 2015


In April, the Labor Department issued a Proposed Fiduciary Rule for those providing retirement advice.  For the first time, retirement advisers will be required to put their clients' best interest before their own.  It may come as a surprise to 401(k) and IRA investors that their advisors are currently not required to act in the investor's best interest.


A report issued by the White House Council of Economic Advisers found that conflicts of interest cost investors $17 billion dollars in lost retirement savings each year. The report did note that one part of the financial services industry has long been held to the highest fiduciary standard of putting clients' interest first: investment advisors registered with the SEC (IAP is such a firm).


Brokers, however, have only been bound to a lesser standard-suitability.  There has never been a prohibition against recommending high cost products or not disclosing the non-fiduciary relationship they have with their clients.  That will all change for retirement investors (but not for personal accounts) under the proposed rule.


The proposed rule does carve out conflict of interest exemptions for long-standing practices of commission based compensation, revenue sharing and 12b-1 mutual fund fees.   The brokers will also have a new exemption for principal transactions-where they sell clients investments the brokerage firm currently owns.  But, they will have to commit in writing to putting their client's interest first in all of those situations, and explain their compensation as well.


The comment period for the proposed rule ends on July 6, so watch out for some heated responses from the big brokerage firms-those with the most to lose.

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