U.S. weakens retirement advice rule, responding to industry
WASHINGTON The Obama administration on Wednesday unveiled its final version of a retirement advice rule aimed at ensuring that broker-dealers put their clients' interests ahead of their own profits, though it was softened in response to industry complaints.The rule, requiring broker-dealers who provide advice to follow a "fiduciary standard," will take full effect on Jan. 1, 2018, according to the Labor Department.The rule aims to end potential conflicts of interest by brokers who advise on individual retirement accounts and to protect consumers from buying unnecessary investment products.Under the rule, brokers would have to act in clients' best interests when advising about IRAs. Industry rules have long required brokers to recommend investments that are "suitable," based on factors such as an investor's age and risk tolerance. But brokers can receive significant fees when clients "roll over" assets from employer-sponsored retirement plans into IRAs.The Labor Department, which regulates retirement plan advice, withdrew its initial proposal for the rule in 2011 after widespread criticism.
Last year, it introduced a new draft that raised alarms at financial services firms, which said the requirements would drive up costs and put affordable retirement advice out of reach for lower- and middle-income people.A Labor Department summary of the final version, however, reflects key changes in response to industry concerns, said Marcia Wagner, a Boston-based lawyer who advises retirement plan providers."The department really did listen to a lot of the comments and made an effort, as much as it’s able to do, bureaucratically and probably politically, with the more onerous problems," Wagner said.
For example, the draft proposed an eight-month deadline to comply with the rule, which firms said was unrealistic. It also listed types of assets that advisers could recommend in order to steer retail investors away from alternative investments and other high-risk products. The final version eliminates that list, mostly in response to the financial industry's concerns, the Labor Department said.
Under the final version, advisers may also recommend some in-house investment products, branded with their firms' names, as well as insurance products such as variable and indexed annuities.Brokerages and many U.S. lawmakers were also concerned about a requirement that brokers sign "best-interest contracts" with clients at initial meetings. The document was to include investment projections, fee disclosures and other detailed information. While the contracts remain in place under the final rule, they can now be as short as a paragraph, Labor Secretary Thomas Perez said, and can be signed later along with other paperwork when customers open accounts. The final version also loosened compensation guidelines, allowing advisers to collect "common types of compensation," such as commissions and revenue-sharing, where brokerages receive payments from mutual-fund companies to help promote products.Nonetheless, implementing the rule will be costly and challenging for firms, Wagner said. She said they would have to train and monitor the many employees who have never been fiduciaries, as well as draft new disclosures for client paperwork.