WASHINGTON — After years of a Washington dispute over investment advice, the Obama administration is proposing tougher restrictions on brokers who manage Americans’ retirement accounts. The change would put brokers — who sell stocks, bonds, annuities and other investments — under the stricter requirements for registered financial advisers.
That could alter the types of investments a broker recommends to you for your retirement account. Their advice could move away from riskier investments. And a broker may have to tell you when they have a conflict of interest regarding a financial product — like receiving fees — that could prevent them from putting your interest first in recommending it.
The Labor Department will put forward the proposal, making it available for public comment for several months.
Americans increasingly are seeking financial advice to help them navigate an array of options for retirement, college savings and more. A lot of people provide investment advice, but not all of them are required to disclose potential conflicts of interest.
The management of trillions of dollars in retirement accounts like 401(k)s and Individual Retirement Accounts could be affected. About $4.5 trillion sat in 401(k) retirement accounts as of last Sept. 30, plus $2.2 trillion in other defined-contribution plans such as federal employees’ plans and $7.3 trillion in IRAs, according to the Investment Company Institute, an industry group.
The proposal would bring a stricter regime for brokers handling retirement accounts, making them fiduciaries. Fiduciaries are obligated to put their clients’ interests first.
A new report from the White House’s Council of Economic Advisers concludes that investors lose billions of dollars a year because of brokers’ conflicts of interest. President Barack Obama drew attention to the proposal in an address at AARP headquarters Monday, saying it’s aimed at preventing financial professionals from “bilking hardworking Americans out of their retirement money.”
Some questions and answers:
BROKERS? FINANCIAL ADVISERS? WHAT’S THE DIFFERENCE?
It’s significant. Brokers buy and sell securities and other financial products on behalf of their clients. They also can give financial advice, with one key requirement. They must recommend only “suitable” investments based on the client’s finances, their age and how much risk is appropriate for him or her.
So they can’t pitch penny stocks or real estate investment trusts to an 85-year-old woman living on a pension, for example. But brokers can nudge clients toward a mutual fund or variable annuity that pays the broker a higher commission — without telling the client. Brokers don’t have to disclose that potential conflict of interest.
Registered investment advisers, on the other hand, are “fiduciaries” like doctors or lawyers. By law they are considered trustees for their clients and are obligated to put the clients’ interests first. That means disclosing potential conflicts as well as fees they receive and any previous disciplinary actions against them. They must tell a client if they, or their firm, receive money from a mutual fund company to promote a product. And they have to register with the Securities and Exchange Commission, opening them to possible close inspections and supervision.
WHAT WOULD THE LABOR DEPARTMENT PROPOSAL DO?
It would put brokers under the stricter requirements when they handle clients’ retirement accounts. The Labor Department has been grappling with this issue for years. Labor withdrew an earlier proposal in 2010 amid an outcry from the financial industry, which said it would hurt investors by limiting choices.
The proposal updates the Employee Retirement Income Security Act, known as ERISA, enacted in 1975. That was a drastically different time, with traditional company pension plans still the dominant source of retirement income and 401(k) plans not yet born. (Companies began adopting 401(k)s in 1979, enabling workers to set aside pre-tax money from their paychecks for retirement and allowing for employer contributions.)
SO THE FIDUCIARY REQUIREMENT MAY BE EXPANDED. WHAT’S THE ARGUMENT FOR THAT?
A coalition of consumer, labor and civil rights groups called SaveOurRetirement has been stirring up support for Labor Department action. It says the current system provides a loophole for professionals giving investment advice that through higher fees, can drain away thousands of dollars from a single retirement account.
Losing a bit each year to fees can add up to a lot over time for retirement savers, says David Certner, legislative policy director at AARP, a coalition member. “It’s the difference between an earthquake and termites,” he suggested. A quake’s impact on your house is immediate and obvious, but termites can chip away at it over a long period.
AND THE OTHER SIDE OF THE FIGHT?
Among the opponents are the Securities Industry and Financial Markets Association, the brokerage industry’s big lobbying group, and the Financial Services Roundtable, whose members include the largest banks. They take the opposite tack: That retirement savers who get advice from a securities industry professional usually wind up with fatter account balances.
A memo issued by the roundtable warns that the proposal “will likely limit many American workers’ access to financial guidance, investment products and access to professional retirement planning from qualified financial professionals.” And that would fall especially hard on mid- and low-income employees with smaller retirement balances, it said.
WHAT ABOUT CONGRESS?
Some lawmakers whose powers were augmented by the Republicans’ victory in the November midterm elections have stepped out in front of the administration’s move. Sen. Orrin Hatch, R-Utah, the new chairman of the Senate Finance Committee, says he plans to bring forward legislation that would move authority over fiduciary-duty rules from Labor to the Treasury Department. Treasury could be viewed as friendlier territory toward the financial industry than Labor.
And Sen. Ron Johnson, the Wisconsin Republican now heading the Homeland Security Committee, has asked Labor Secretary Thomas Perez in a letter how his department will ensure that the proposal “does not adversely affect middle and low-income Americans.”
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