The U.S. Department of Labor today enacted a regulation that would require retirement brokers and advisors to disclose to clients whether they receive a commission for recommending certain products.
The regulation, which has been under consideration for several years and is controversial in the retirement advisory industry
, would call for advisors to meet a “fiduciary standard” by putting clients’ interests before their own in endorsing investments for individual retirement accounts.
The DOL did soften some of the requirements that were in its proposed regulation when it announced the final rule
today, which is scheduled to go into effect by Jan. 1, 2018.
Under the proposed rule, retirement advisors would have been required to enter into an advisory contract to give advice to a client, and would likely charge an upfront fee of about 1 to 2 percent to serve that client. That would have been a departure from many advisors’ current model under the “suitability standard,” through which an investment that is suitable to the client is recommended and the advisory fees are covered by commissions from the financial product providers.
These requirements could have made it difficult to begin discussions with a potential client, and could have also increased the cost to the consumer, opponents said. Broker feedback on the proposed rule included concerns that the rule would destroy many companies’ business models.
The modified rule announced today would only require that the fiduciary disclosure be made during the usual document sharing and contracting process when bringing on new IRA clients, said Bob Lawton, president of Lawton Retirement Plan Consultants LLC in Milwaukee.
Lawton’s firm is a registered investment advisor, a category of retirement advisors which already was required to meet the fiduciary standard.
Today’s announcement also excluded some proposed limits on the type of investments that could be included in retirement accounts.
“It’s fair to say (the DOL) got a lot of feedback from the brokerage community and there were a lot of things the brokerage community did not like,” Lawton said. “They took off the sharp edges or rounded the corners and made it much easier for the brokerage community to implement fiduciary responsibility.
“Although these regulations are clearly a win for retirement plan sponsors and employers…I think these final regulations are also a big win for the brokerage community. What they could have potentially received could have been much, much worse.”
More information about the rule, including the full text, is available at www.dol.gov/protectyoursavings
According to DOL tweets about the regulation this morning, Labor Secretary Thomas Perez said:
"Our conversation today is about what it really means to be middle class. A consumer's best interest must now come before an advisor's best interest. ‘Suitable advice' sure as heck isn't right and sure as heck isn't fair. The interests of the consumers are all too frequently misaligned from the financial interests of the firm and the advisor. Today's rule ensures that putting clients first is no longer just a marketing slogan – it's the law. I am confident the industry will be able to comply with the streamlined rule."