DOL Proposes More Limits on Financial Advisors

They are designed to force brokerage firms to put investors' needs first, instead of selling products that generate a higher payout for them.

By Jarrett Renshaw

The Biden administration is seeking to impose new rules on retirement plan providers to close loopholes that officials argue allow the industry to sell products that boost their revenue at the expense of customers, the latest effort by the administration to crack down on so-called junk fees.

The DOL’s updated definition of an investment advice fiduciary would apply when financial services providers give investment advice for a fee to retirement plan participants, individual retirement account owners and others. For example, advisors could only sell commodities and insurance products, such as annuities, to clients when doing so is in the customer’s best interest.

On Nov. 15, the DOL announced it would hold an online public hearing on the new rule beginning Dec. 12. Advisors and investors may testify, but most register to do so by Nov. 29.

“Analysis of just one investment product — fixed index annuities — suggests that conflicted advice could cost savers up to $5 billion per year for this product alone,” the DOL said in a statement. “The proposed rule would also ensure investment professionals are able to compete for business on a level playing field, instead of an unbalanced system that holds advisers to different standards based on their recommended products.”

The rule would also hold Wall Street to a higher standard for the advice they provide when people roll over assets from an employer plan to another account, such as employee-sponsored 401(k) to an Individual Retirement Account.

“Financial advisors should put savers best interest first, and not sell them lower returning products in order to maximize their own fees,” Lael Brainard, director of the White House National Economic Council, said.

“When a retirement saver pays for trusted advice that is actually not in their best interest and comes at a hidden cost to their lifetime savings, that’s a junk fee,” Brainard said.

President Joe Biden has joined with companies such as Airbnb (ABNB.O) and Live Nation (LYV.N) to crack down on junk fees — or extra charges — customers pay when booking concert tickets, hotels and airfares. Taking on “junk fees” gives Biden and his allies fodder to show they are helping people tackle costs as many Americans are dissatisfied with his economic stewardship.

The proposed Labor Department rule is designed to force brokerage firms to put investors’ needs first, instead of selling products that generate a higher payout for them.

Securities and Exchange Commission rules require that advice to purchase securities like mutual funds be in the saver’s best interest, but that authority does not extend to commodities or insurance products like fixed index annuities, which are often recommended to retirement savers.

The proposed rule, announced in late October, would ensure that retirement advisors must provide advice in the saver’s best interest, regardless of whether they are recommending a security or insurance product and where they are giving advice, senior administration officials said.

The federal law governing retirement plans doesn’t always require retirement advisors, who provide advice on a one-time basis, such when rolling over assets from a 401(k) plan into an Individual Retirement Account (IRA) or annuity, to look out strictly for the saver’s interest.

In 2022 alone, Americans rolled over approximately $779 billion from defined contribution plans, such as 401(k)s, into IRAs. The proposed rule will close this loophole to ensure this advice is in the saver’s best interest.

“This proposed rule is an important step forward toward improving the retirement security of all Americans,” the CFP Board said in a statement. “The outdated law does not prevent advisors from taking advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the advisor well but eat away at retirement investors’ nest eggs over time.” The CFP Board noted that it will carefully review the details of the proposed rule and assess its effectiveness so that all financial advisors who provide retirement investment advice must “put the best interests of their clients first.”

Dale Brown, president and CEO of the Financial Services Institute (FSI), whose members are committed to complying with the SEC’s Regulation Best Interest (Reg BI), issued a more cautious statement following the DOL announcement on the proposed fiduciary rule: “It is imperative that new regulations harmonize with Reg BI,” he says. “Introducing more conflicting regulations would be unnecessary and could potentially hinder middle-class Americans’ ability to achieve a financially secure retirement.”

The proposals include a 60-day period for public comments and instructions on how to submit comments. The department also intends to hold a public hearing approximately 45 days after the proposals are published. Further information on the hearing will be published in the Federal Register at a later date.

This article was provided by Reuters. Rethinking65 contributed to this article.

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