On Tuesday, the Department of Labor officially announced a proposed rule change that would require all financial advisers to put their clients’ best interests before their own.
Currently, brokers who advise people trying to make decisions about retirement savings aren’t legally obligated to steer clients to the best option for their needs. Instead, they can advise clients into products that may make them or their firms more money but may not be the right choice. It’s been estimated that Americans lose about $17 billion a year to this conflicted advice every year.
Under the rule change, all retirement advisers — including brokers, registered investment advisers, insurance agents, and others — who get paid to provide retirement investment advice would have to adhere to a fiduciary standard, which would mean they would be obligated to give advice that is in the best interest of their clients. They would also not be able to accept any payments that could create conflicts of interest, such as fees earned for recommending certain financial products, unless they enter into an exemption contact. But Perez noted that advisers will still have broad leeway in their payment structures and still be able to work on commission, revenue sharing, and 12b1 fees, which relate to mutual funds.
The Department of Labor’s analysis found that it would save investors more than $40 billion over ten years on the low end.
On a call with the press, Labor Secretary Thomas Perez noted the proposal is “intended to provide guard rails but not strait jackets” for the industry. To that end, the “best interest exemption contact” would allow firms to keep setting their own compensation practices as long as they commit to putting clients’ interests first. They also have to adopt policies and procedures that minimize any conflicts of interest and “clearly and prominently” disclose those conflicts that may remain. Noting that investment advisers say they put clients’ interests first, Perez said, “This rule will simply codify what they say they are already doing.”
If firms violate these agreements, it would be considered a breach of contract and customers could enforce it through arbitration. Firms could also face an excise tax for violating the contracts.
The proposed rule would not apply to appraisals or valuations of employee stock plans, nor would it apply to those who provide financial education, such as call center employees.
Jeff Zients, director of the National Economic Council, noted that for some financial industry groups, the best outcome would be no rule. But for the administration, “That is not an acceptable outcome,” he said.
The process is far from over, however. After the proposed rule is made public, there will be a 75-day period for comment, after which there will be a public hearing, a public transcript of the hearing, another opportunity for comment, and a final review before a final rule is announced. Perez declined to estimate when the final rule may come out.
The change will have increasing importance as more and more Americans struggle to save up enough for a secure retirement. About a third of working-age people have less than $1,000 in savings and retirement set aside, and there is a $6.6 trillion gap between what Americans should have saved up and what they have actually saved for retirement. But few can rely on pensions, which guarantee a certain payment in retirement, and instead most workers now rely on 401(k)s and IRAs, which fluctuate based on investment decisions and the market.