Up until now, the financial advisers who help retirees decide where to put their investments could legally steer clients toward decisions that made themselves more money at their clients’ expense. Now that practice will be against the rules.
On Wednesday, the Department of Labor (DOL) issued a final rule that will require those advisers to adhere to a “fiduciary standard,” or in other words to always put clients’ interests ahead of their own when they make recommendations about investing in exchange for fees or other payment. They will have to make “prudent” investment recommendations, according to the DOL, that don’t take their own interests into account, as well as charge reasonable compensation that doesn’t create a conflict of interest and fairly represent their recommended investments. Compliance will be required in a year, beginning in April of 2017.
The final rule does include a carve out for advisers to keep getting some forms of compensation for their work that could potentially create conflicts of interest, such as commissions. Firms that want to keep using those forms have to get an exemption permit from the DOL that ensures they mitigate those conflicts and disclose basic information about the compensation practices to their clients. The exemptions will be phased in more gradually than the overall rule, beginning in early 2017 and going into full force in January 2018.
Not all communications between financial advisers and their clients will be covered by the new regulations, and the final rule makes explicit some of those situations: financial education, general communications like newsletters or public remarks, or dealings with other fiduciaries, for example.
The changes are significant given the enormous sea change in retirement investments away from guaranteed pension payments managed by professional investors to 401(k) retirement accounts that depend on individual employees to make good choices in order to have enough money in old age. Under the prior regime, Americans were losing an estimated $17 billion a year to conflicted advice. They can little afford to lose such large amounts of money given that about a third of working age people have less than $1,000 saved up for retirement, while under 60 percent of working age people have no retirement savings at all.
The DOL issued a proposed rule change to get rid of conflicts of interest a year ago, and in that time received thousands of comments and petitions, many from the financial industry in opposition. In light of some of those complaints, the final rule made some changes and clarifications around exempted activities, streamlined some pieces, and phased in others. At the same time, some critics of the backlash from the financial industry, most prominently Sen. Elizabeth Warren (D-MA), have charged that the complaints that firms made publicly conflicted significantly with assurances they made to their investors about the impact the rule change will have on their businesses.