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American Funds - DOL Fiduciary Rule - In-depth report 4/6

New Top Tier

U.S. Unveils Retirement-Savings Revamp, but With a Few Concessions to Industry
Apr 6, 2016 | The Wall Street Journal
By Yuka Hayashi & Anna Prior

The Obama administration Wednesday rolled out a long-anticipated new rule aimed at transforming the way the financial industry delivers retirement-savings advice—but offered significant concessions to critics that could make it more palatable and less disruptive for brokers.
New Retirement-Account Rules: What Individual Investors Need to Know
Apr 6, 2016 | The Wall Street Journal
By Anne Tergesen

New rules from the Labor Department are expected to have a big impact on the way Americans save for retirement. Scheduled to go into effect in phases, starting in April 2017, they extend to individual retirement accounts a revamped version of the “fiduciary” standard that governs corporate retirement plans like 401(k)s.
Retirement-Savings Rule: Who Wins
Apr 5, 2016 | The Wall Street Journal
By Michael Wursthorn, Sarah Krouse & Leslie Scism

The financial industry has mounted a fierce campaign against the government’s new rule imposing stricter standards on retirement advisers, saying burdensome requirements will crimp the sector.
What New Rules on Inversions and Fiduciary Duties Remind Us About November
Apr 6, 2016 | The Wall Street Journal
By David Wessel

Much to the consternation of Republicans in Congress and their allies, the Obama administration has displayed a substantial amount of regulatory muscle this week.
Rules for Indexed Annuities Face an Unexpected Tightening
Apr 6, 2016 | The Wall Street Journal
By Anna Prior & Leslie Scism

Just days ago, it appeared that new U.S. rules on retirement-savings advice might inadvertently boost sales of an insurance-company product that has drawn criticism for its complexity and high compensation to sellers. Instead, the final rule issued by the Labor Department on Wednesday toughens standards for advisers recommending these “indexed annuities” to retirement savers.
Reactions to the Labor Department’s Fiduciary Rule
Apr 6, 2016 | The Wall Street Journal
By WSJ Staff

The Labor Department announced new rules Wednesday that are expected to have a big effect on how Americans save for retirement. The regulation extends to individual retirement accounts a revamped version of the “fiduciary” standard that governs corporate retirement plans like 401(k)s.
What New Rules on Retirement Savings Mean for Investors
Apr 6, 2016 | The New York Times
By Tara Siegel Bernard

The Labor Department introduced new rules on Wednesday that will help protect Americans saving for retirement. While investors often assume the people who handle their savings are providing advice that is in their best interest, that is not always the case. Here is how things will change.
‘Customers First’ to Become the Law in Retirement Investing
Apr 6, 2016 | The New York Times
By Tara Siegel Bernard

The rules governing how financial professionals handle the trillions of dollars they invest on behalf of Americans saving for retirement are about to get a lot tougher.
U.S. weakens retirement advice rule, responding to industry
Apr 6, 2016 | Reuters
By Suzanne Barlyn & Lisa Lambert

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.
COLUMN-Best-interest standard is a game-changer for IRA rollovers
Apr 6, 2016 | Reuters
By Mark Miller

A friend called recently looking for advice about her 401(k). Kate had decided to leave her job to pursue new career options, and money was tight during the transition. Should she roll over her $250,000 nest egg and withdraw some of the funds to help her through the career transition? An adviser at a brokerage firm was proposing that she close out her 401(k) account and open an IRA that would cost three times as much in annual fees. I explained to Kate (not her real name) that this "adviser" was not acting in her best interest.
Factbox - Department of Labor retirement 'fiduciary' rule
Apr 6, 2016 | Reuters
By Tariro Mzezewa

The U.S. Department of Labor plans to announce on Wednesday its rule requiring financial advisers and brokers to act in the best interest of retirement clients when providing investment advice.
Stricter Rules Unveiled for Brokers Giving Retirement Advice
Apr 6, 2016 | Associated Press
By Bernard Condon

WASHINGTON — The Obama administration acted Wednesday to require that brokers who recommend investments for retirement savers meet a stricter standard that now applies to registered advisers: They must act as "fiduciaries" — trustees who are obligated to put their clients' best interests above all.
Conflict of Interest Rule Could Save Americans Billions in Retirement
Apr 6, 2016 | Bloomberg
By Jordan Yadoo

When it comes to retirement planning, it's not just about how much you save, but with whom. A new Labor Department rule announced Wednesday will require brokers to put clients' interests ahead of their own when it comes to retirement investments, tightening current industry standards that can incentivize brokers to push high-fee products that prioritize their own profits.
Brokers Upended by Obama's Tough Rules for Retirement Advice
Apr 6, 2016 | Bloomberg
By Robert Schmidt & Margaret Collins

U.S. brokers managing retirement accounts must adhere to tough new standards under an Obama administration rule released Wednesday that aims to protect millions of savers from conflicted investment advice.
VIDEO: New U.S. Labor Department Rule Puts Retirees First
Apr 6, 2016 | Bloomberg

U.S. Labor Secretary Tom Perez discusses consumer protections in a new fiduciary rule aimed at financial advisors. He speaks with David Westin on "Bloomberg ‹GO›." (Source: Bloomberg)
US makes concessions on retirement advice fees
Apr 6, 2016 | The Financial Times
By Stephen Foley

The investment industry has wrung a series of concessions from the Obama administration in new rules that the White House says will save US retirement savers $17bn a year in hidden fees, outsize commissions and poor returns from conflicted financial advice.
Wall Street Dodged a Bullet on the Retirement Fiduciary Rule
Apr 6, 2016 | Fortune
By Joshua Brown

The industry is 5 years ahead of regulators.
Fiduciary Light
Apr 6, 2016 | Forbes
By Frank Armstrong III

The Labor Department (DOL) took action because the Securities Exchange Commission (SEC) wouldn’t. So, today we have Fiduciary Light from DOL.
How the fiduciary rule works
Apr 6, 2016 | CNBC
By Sharon Epperson

You may have assumed that the financial professional you've relied on to advise you on your retirement savings had your best interests at heart. That was not always the case.
Obama administration targets financial advisers better at enriching themselves than clients
Apr 6, 2016 | MarketWatch
By Elizabeth O'Brien

The Department of Labor today released long-awaited regulations that could make big changes to the way retirement advice is delivered throughout the country.
Labor Department Rule Sets New Standards For Retirement Advice
Apr 6, 2016 | The Washington Post
By Jonelle Marte

The Labor Department released more details Wednesday about a long-awaited rule that would set limits on the advice that brokers can offer to retirement savers.
White House locks in new rules for financial advisers
Apr 6, 2016 | The Hill
By Peter Schroeder

The Obama administration on Wednesday unveiled new rules for retirement investment advisers, turning aside pressure from industry groups to abandon the proposal.
What it means for investors: Rules for financial advisers are changing
Apr 6, 2016 | USA Today
By Lisa Kiplinger

Jamie Hopkins, professor at The American College of Financial Services, breaks down the new fiduciary standards and how it will impact you.
New rules force financial advisers to do what's best for their clients
Apr 6, 2016 | USA Today
By Robert Powell

Six years in the making, rules to force financial advisers to do what's best for their clients — rather than themselves — are finally a reality, and they could potentially save investors $40 billion over 10 years, according to the Labor Department.
Retirement Savers Get New Legal Protections
Apr 6, 2016 | Kiplinger's
By Elizabeth Leary

In a long-anticipated move, the U.S. Department of Labor on April 6 unveiled a final rule that raises the bar for investment advice provided to retirement savers. Under the rule, essentially anyone providing investment advice on a retirement account in exchange for compensation must act as a fiduciary, meaning he or she must put the investor’s best interests ahead of his or her own.
New Obama rule goes after shady financial advisers
Apr 6, 2016 | CNN Money
By Heather Long

Work hard. Save a lot. Retire in peace. That's the goal. People get derailed on their way to a happy retirement for many reasons, but the Obama administration says costly -- or outright bad -- financial advice shouldn't be what holds you back. A new rule unveiled today by the Obama administration requires retirement advisers to always act in the best interest of their client.
Conflicted By a Conflict of Interest
Apr 6, 2016 | The Huffington Post
By Lenny Sanicola

The Department of Labor today released long-awaited regulations that make big changes to the way retirement advice is delivered. The final “new fiduciary rule” was announced after numerous years of discussions, lobbying, comment periods, and further considerations. The impetus for the new regulations was that the prior rule allowed for conflicts of interest and biased guidance. With the objective of toughening the oversight of financial professionals who are paid to give retirement advice, the new Conflict of Interest rule requires brokers and certain other individuals serving as fiduciaries to be held to a higher standard.
New Investor Protection Rules Expose An Industry War For Americans’ Retirement Assets
Apr 6, 2016 | International Business Times
By Owen Davis

The biggest regulatory battle to face the financial industry since the Dodd-Frank Act passed a milestone Wednesday as the Department of Labor released a final rule addressing the conflicts of interest endemic to the retirement advice industry. The new guidelines, which require financial advisers to disclose conflicts, and compel them to act in the best interests of their clients, didn’t come without a fight. Lobbyists for Wall Street broker-dealers and insurance companies spent millions of dollars in an attempt to convince the Labor Department — and Congress — to alter or delay the rules.

New Financial Trade

Brokerage Industry Still Cool On Final DOL Rule
Apr 6, 2016 | Financial Advisor
By Dan Jamieson

While supporters of the DOL’s fiduciary rule sang its praises Wednesday as the department unveiled the final version of its controversial plan, some in the brokerage industry had a decidedly frosty response.
DOL Leaves The Door Open For Rollovers
Apr 6, 2016 | Financial Advisor
By Christopher Robbins

In the fallout over the final version of the Department of Labor’s sweeping fiduciary rule, advisors are praising a change that many say will enable them to provide more holistic advice on a client’s retirement accounts. Under the rule’s final language, fiduciary advisors will receive an exemption for advice they provide to clients deciding whether to roll over an employee-sponsored retirement plan like a 401(k).
How the DOL Fiduciary Rule Will (and Won’t) Affect RIAs
Apr 6, 2016 | ThinkAdvisor
By James J. Green

In March, a prominent RIA chuckled when asked how he was preparing his wealth management firm for the Department of Labor’s redefinition of fiduciary under ERISA. “I’m sick of hearing about this rule,” he said, suggesting that the rule would not affect his firm at all.
How the DOL Fiduciary Rule Will Affect Rollover IRAs, Annuities and Other Products
Apr 6, 2016 | ThinkAdvisor
By Bernice Napach

The final fiduciary rule announced by the Department of Labor on Wednesday does not go as far as many critics of the proposed rule had feared, but it will have an impact on financial advisors and the products they offer to clients. It’s also expected to accelerate the move from a commission-based business to fee-only model, which has been an ongoing and growing development in the evolution of the industry.
Perez: DOL Fiduciary Rule Can Survive Lawsuits
Apr 6, 2016 | ThinkAdvisor
By Melanie Waddell

The Department of Labor is confident that its just-released rule to amend the definition of fiduciary under the Employee Retirement Income Security Act will survive legal challenges, the two top architects of the rulemaking said Wednesday.
Initial Reaction to Fiduciary Rule Mostly Positive
Apr 6, 2016 | PlanSponsor
By Rebecca Moore

The Department of Labor (DOL) has finally issued its final fiduciary rule (or what it calls the conflict-of-interest rule), and comments from consumer and financial industry groups have been pouring in. While most are still digging into the details of the final rule, the initial response has been mostly positive. The final rule includes changes the DOL said were in response to industry concerns.
Early Fiduciary Rule Interpretation from ERISA Experts
Apr 6, 2016 | PlanAdviser
By John Manganaro

ERISA experts warn that it will take some time to judge the final fiduciary rule published by the DOL, given the serious length and complexity of the rulemaking language. All told, the Department of Labor (DOL) published nearly 1,000 pages of text in its unveiling of the final fiduciary rule Wednesday morning, with implementation dates ranging from April 2017 through the beginning of 2018.
Digital Wealth Leaders Celebrate Fiduciary Rule
Apr 6, 2016 | Financial Planning
By Suleman Din

While much of the wealth management industry cautiously mulled over the potential impact of the fiduciary rule, digital-first firms were quick to celebrate. Sitting on the very panel in Washington as the rule was dissected was Christopher Jones, chief investment officer at Financial Engines. The moment in history wasn't lost on him.
Roth: Will the Fiduciary Standard Actually Help Consumers?
Apr 6, 2016 | Nasdaq
By Financial Planning

At first blush, the fiduciary standard is a big win for consumers. Hopefully it will be, though I have my doubts. It’s still the Wild West when it comes to investment advice. It’s absolutely legal for an advisor to capture the lifetime savings a consumer has built up in their 401(k), have them roll it into an IRA and then sell them an annuity paying handsome commissions -- that leads to a nice trip to the Ritz-Carlton Grand Cayman to boot. That’s more than wrong and I’ve seen it too many times. But will the fiduciary rule fix these abuses?
Organizations largely applaud new DOL fiduciary rule
Apr 6, 2016 | Pensions & Investments
By Hazel Bradford

Advocacy groups are mostly in favor of the new fiduciary standard released Wednesday by the Department of Labor.
Frequently asked questions about the DOL fiduciary rule
Apr 5, 2016 | Investment News
By Elizabeth MacBride

Answers to common sources of confusion or misunderstanding about the new regulation
Critics say DOL fiduciary rule makes too many industry concessions
Apr 6, 2016 | Investment News
By Jeff Benjamin

The rule the Department of Labor published Wednesday raising investment advice standards for retirement accounts is so watered down in response to industry concerns that investors may not be any better off, critics say.
DOL Unveils Final Version of Fiduciary Rule
Apr 6, 2016 | Ignites
By Emile Hallez

The Department of Labor will publish the final version of its long-awaited fiduciary rule today, ending a years-long process that has prompted an enormous amount of opposition from the financial services industry.
Retirement Savers Get Added Protections From New Rules For Brokers
Apr 6, 2016 | Investor's Business Daily
By Paul Katzeff

Individual investors won some but not all of what was hoped from a sweeping new rule that tightens conflict-of-interest standards for brokers. Those brokers manage trillions of dollars in retirement accounts such as 401(k)s and IRAs, creating compliance headaches and liability issues for the financial industry.
Tech Firms Are Both Catalyst and Beneficiary of DOL Fiduciary Rule
Apr 6, 2016 | WealthManagement.com
By Ryan W. Neal

The Department of Labor released the final version of the fiduciary rule on Wednesday, and though it was was more lenient than many expected, wealth management technology vendors see the rule as a catalyst for widespread adoption of their products by financial advisors.
Fiduciary rule adds more oversight to plan sponsor responsibilities
Apr 6, 2016 | Employee Benefit News
By Andrea Davis & Paula Aven Gladych

Retirement plan industry experts are greeting the Department of Labor’s final fiduciary rule with a mix of caution and optimism, with some calling it a “big win” for 401(k) plan sponsors and participants and others saying it has the potential to confuse employers and disrupt their ability to engage employees in retirement planning.
DOL Punts On Fiduciary Rule Change: Financial Advisors' Daily Digest
Apr 6, 2016 | Seeking Alpha
By Gil Weinreich

The chorus of news reports and commentary - anticipating a wholesale change in the way a large proportion of financial advisors do business - sang in perfect harmony.
New Fiduciary Rule – $14 Trillion In Assets To Be Impacted
Apr 6, 2016 | Value Walk
By VW Staff

Lots of talk about the new fiduciary rule

Other Coverage

Here's what the Obama administration's new $12 trillion rule means for your money
Apr 6, 2016 | Business Insider
By Kathleen Elkins

On Wednesday, the US Department of Labor announced a new fiduciary rule, which will require investment advisers to put client interests above their own when it comes to investment choices for retirement accounts.
The Obama Administration Is Finally Making Retirement-Savings Advisers Put Clients First
Apr 6, 2016 | Slate
By Helaine Olen

Saving for retirement might just get a bit easier for millions of Americans in the coming years, and for once, we don’t need to do a thing. This time, it’s our financial advisers who are being held to account.
DOL Releases Bold New Retirement Investment Protections
Apr 6, 2016 | The American Prospect
By Justin Miller

Flanked by Democratic allies in Congress on Wednesday, Secretary of Labor Tom Perez unveiled the final version of the long-awaited fiduciary rule, which requires that, like doctors and lawyers, retirement account brokers must act in their clients’ best interest.
Financial industry reaction mixed on White House investment advising rule
Apr 6, 2016 | Cleveland.com
By Stephen Koff

WASHINGTON -- The investment industry is reacting with mixed signals to today's White House announcement that advisers and brokers who recommend stocks, bonds, mutual funds, annuities and other instruments for retirement saving must act in the client's best interest.
What The New 'Fiduciary Rule' Means For Investors
Apr 6, 2016 | Benzinga
By Brian Dolan

The US Dept. of Labor has issued new rules governing conflicts of interest in financial advice from brokers managing retirement accounts. The new rules require US securities brokers to adhere to a ‘fiduciary rule,’ which means that investment advisors must put their clients’ interests first. You may be asking yourself, “Didn’t brokers always have that obligation?” The answer would be no, they didn’t.

New Top Tier

U.S. Unveils Retirement-Savings Revamp, but With a Few Concessions to Industry

Apr 6, 2016 | The Wall Street Journal

By Yuka Hayashi & Anna Prior

WASHINGTON—The Obama administration Wednesday rolled out a long-anticipated new rule aimed at transforming the way the financial industry delivers retirement-savings advice—but offered significant concessions to critics that could make it more palatable and less disruptive for brokers.
The fiduciary rule is aimed at curbing billions of dollars in fees paid annually by small savers who transfer money out of 401(k)s, which are required to operate in their best interests—and into individual retirement accounts, which aren’t currently bound by such protections. There, savers may be working with financial-product salespeople who earn more selling certain products and don’t have to put their clients’ interests before their own.
Administration officials intend it as a direct attack on what they consider “a business model [that] rests on bilking hard-working Americans out of their retirement money,” Jeff Zients, director of the White House National Economic Council, told reporters Tuesday.
About $14 trillion in retirement savings could be affected by the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.
Still, reflecting intense lobbying from the financial industry that has fought the regulation since it was first proposed six years ago, the final version includes a number of modifications aimed at softening some of the most contentious provisions.
Among such changes: extending the implementation period of the rule beyond the end of the current administration; giving advisers more flexibility to keep touting their firm’s own mutual funds and other products; and curbing the paperwork and disclosure requirements.
But those fixes, rather than mollifying critics, could also give opposing companies and skeptical lawmakers more time to try to dilute the rule further or even try to kill it altogether under the new administration.
It is unclear yet how opponents will react, because the administration disclosed the new details of the rule to journalists Tuesday but embargoed the release until early Wednesday morning.
“Unless we see fundamental changes, this rule will remain unworkable, and we will consider every approach to address our concerns,” David Hirschmann, head of the U.S. Chamber of Commerce’s capital-markets division, said in a statement Tuesday. The chamber has said it was considering a lawsuit to block the regulation.
After the Labor Department released the preliminary version of the rule last April, it received more than 3,000 public comments. “With every meeting we took, every comment letter we read...we got smarter and we listened, we learned and we adjusted,” Labor Secretary Thomas Perez said on a conference call with reporters. “You’ll find that reflected in the final rule.”
The new rule will be the centerpiece of President Barack Obama’s efforts to help middle-class families build retirement savings in an era when few have guaranteed pension benefits. The administration says retirement advice offered by conflicted financial advisers costs American families $17 billion a year, and pushes down the annual returns on their retirement savings by one percentage point—figures that financial-industry leaders say are greatly inflated.
The broad agenda is shaping up to be a legacy issue for the president, with the implementation of steps such as the launch of a no-frills savings program called “MyRA” and beefing up state-based retirement plans.
“With the finalization of this rule, we are putting in place a fundamental principle of consumer protection into the American retirement landscape,” Mr. Perez said.
A core part of the rule says that if advisers want to continue receiving commissions and other types of compensation for selling specific products, they and their clients need to sign a “best interest contract” in which the adviser pledges to put the client’s interests first.
But the final version eases the limits around that provision a bit. Among the concessions is a new road map providing a way for firms to sell a limited lineup of their own products.
Mr. Perez said, for example, that an employee of MetLife Inc. wouldn’t be obligated to advise clients about offerings from a competitor, like New York Life, so long as the adviser has a reasonable basis to believe that MetLife’s own products are in the best interests of the clients.
To cut down on paperwork that industry officials said would be too burdensome, the new version of the rule only requires that firms sign one “best interest contract” with clients when they open an account. Large asset managers had complained that, under the original rule, individual advisers and customer- service representatives at call centers would have to sign a new contract each time they talked to the customer.
The final rule also makes it easier for firms to deal with existing clients. Companies can simply send a notice to existing clients telling them about the firm’s new obligations without requiring them to sign a new contract, said Mr. Perez.
The latest rule also clarifies that brokers and others can continue offering a wide range of guidance without having to clear the “fiduciary” bar for “advice.” It specifies that investor education isn’t considered advice, allowing companies to continue providing general education on retirement savings. Also excluded from the advice category are general circulation newsletters, media talk shows and commentaries as well as general marketing materials.
A key concession from the administration was giving brokers more time to adjust to what they say will trigger a dramatic change in their industry. The original proposal had called for an eight-month implementation period, a timeline that many in the financial industry had decried as being too short. The final rule adopts a phased-in approach that requires firms to be compliant on several broader provisions by April 2017 and fully compliant by Jan. 1, 2018.
While the government made concessions in some areas, it actually tightened rules for one key sector that could make regulations more burdensome on insurers. The earlier version of the policy allowed advisers and insurance agents to sell certain types of annuities without having to sign the best-interest contract. But the final version adds so-called fixed-indexed annuities to the pool of products that now would require a signed contract before sale.

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New Retirement-Account Rules: What Individual Investors Need to Know

Apr 6, 2016 | The Wall Street Journal

By Anne Tergesen

New rules from the Labor Department are expected to have a big impact on the way Americans save for retirement. Scheduled to go into effect in phases, starting in April 2017, they extend to individual retirement accounts a revamped version of the “fiduciary” standard that governs corporate retirement plans like 401(k)s.
Advisers generally will have to avoid conflicts of interest and pledge to act in the best interest of their clients when providing investment guidance on IRAs—as well as on possible transfers or “rollovers” from a workplace plan to an IRA. Previously, brokers’ recommendations were only required to be “suitable”—a less rigorous standard that critics say has encouraged some advisers to sell high-fee products that pay them high commissions.
Here are answers to questions that individual investors may be asking.
Q: Will this affect my dealings with my adviser?
A: It depends on what type of adviser you have and whether you have savings in a 401(k) plan that might be a candidate for rolling over to an IRA.
When the Labor Department’s rule goes into effect, both brokers and registered investment advisers, or RIAs, will be required to adhere to the same fiduciary standard when providing investment advice on retirement accounts. The rule will have no impact on taxable accounts.
Currently, as long as brokers sell products that are suitable for a client’s needs, they are generally free to recommend investments that earn them higher compensation, even if cheaper alternatives would be better for the investor.
Under the rule, they would have to follow various new procedures to be able to accept sales commissions and other compensation that give them an incentive to favor some products over others.
By contrast, RIAs are already subject to a similar fiduciary standard under a different law that requires them to put clients’ best interests first.
If your adviser is compensated solely by fees that don’t vary based on particular investments used, there will be minimal impact on how he or she works with your existing IRAs. But that adviser will be required to document why any advice he or she offers you on moving money from a 401(k) to an IRA is in your best interest.
Q: What kind of changes am I likely to see?
A: Many brokerage firms plan to steer IRA investors who now pay commissions into accounts that charge annual fees of up to 1% or more.
Some brokerages and financial-advisory firms have warned that they may shed investors with smaller nest eggs—such as, $50,000 or less—because these accounts may no longer be profitable for the company to serve under fee-based arrangements. Others may shift small-balance clients into new stripped-down fee accounts, including with affiliated automated “robo” advisory services.
Some brokers will continue to accept commissions. But to do so, they must ask clients to sign a “best interest contract” that requires the adviser to act in the investor’s best interests and includes information about the firm’s conflicts of interest. They must also make more detailed disclosure about costs and fees available to investors who request it.
In addition, brokers typically won’t be able to suggest that investors roll over money from a company retirement plan to an IRA without signing a best-interest contract. The contract can be signed “at the same time as other account opening documents,” but must retroactively cover any advice given beforehand, according to information released Tuesday by the White House.
Q: Will the new rule affect what I can invest in?
A: Consumer advocates say that by mandating that advisers who serve retirement investors put those clients’ interests ahead of their own, the Labor Department is implicitly encouraging advisers to recommend low-cost investments.
However, the department has removed language in the regulation it proposed a year ago that would have made it very difficult for advisers to sell certain illiquid investments—such as nontraded real-estate investment trusts, hedge funds and private-equity investments—to retirement accounts.
Q: Will the new rule save me money?
A: Maybe. The Labor Department has estimated that the rule could save investors $4 billion a year—a projection brokerages and other investment firms opposed to the rule dispute.
Favoring low-fee investments is a time-tested way to boost the value of a retirement nest egg. Some investors will pay lower fees if they decide to keep money in a 401(k) rather than rolling it to an IRA. Still, if you are in the habit of buying and infrequently trading low-cost investments in a commission-based IRA, you could wind up paying more if your account is converted into a fee-based arrangement.
Q: What happens to my existing investments in brokerage accounts?
Labor Department Secretary Thomas Perez said in a news conference Tuesday that under the final rule, brokerage firms can send existing clients “a notice that tells them the firm has taken on” fiduciary obligations. Clients who wish to opt out of such a relationship can do so, he added.
There is a provision that can allow brokers to receive some continuing compensation from assets already in investors’ portfolios. The White House material says any additional advice must “satisfy basic best-interest and reasonable-compensation requirements.”
Q: When will I see effects?
A: Firms will be required to acknowledge their fiduciary status and make “basic disclosures of conflicts of interest” by April 2017. They will have until Jan. 1, 2018, to comply with the rule’s other provisions and disclosures.
Q: What recourse will I have in the future if I believe my adviser isn’t living up to his or her fiduciary responsibility?
A: The best-interest contract allows investors to take legal action alleging that an adviser has failed to act as a fiduciary. Assuming the final rule includes language that was in the proposal last year, firms would be allowed to include in the best-interest contract a provision generally requiring investors to pursue such individual gripes through arbitration rather than litigation. Investors could also participate in class-action litigation. Those are typically the options now for brokerage clients who allege that their advisers have provided unsuitable advice or engaged in other misconduct.
Experts say the new rule likely will make it easier for investors to successfully bring a claim because brokers working with retirement accounts will generally no longer be able to say they aren’t fiduciaries.

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Retirement-Savings Rule: Who Wins

Apr 5, 2016 | The Wall Street Journal

By Michael Wursthorn, Sarah Krouse & Leslie Scism

The financial industry has mounted a fierce campaign against the government’s new rule imposing stricter standards on retirement advisers, saying burdensome requirements will crimp the sector.
But the rule, expected to be issued Wednesday, is likely to benefit a large number of financial firms as well. Many are gearing up to profit from the changes, just as potential losers look for ways to limit the pain.
The new Labor Department rule requiring advisers working with retirement accounts to put clients’ interests first is expected to accelerate a shift toward accounts with recurring fees rather than commissions for trading. Partly to justify their fees, “a new generation of advisers [will] provide much broader and more well-rounded advice, which includes comprehensive financial planning,” said Greg Ward, a financial planner at Financial Finesse Inc., El Segundo, Calif., which companies hire to provide financial-education programs to employees.
The added focus on low-cost investment products is expected to place an even greater share of stock ownership in the hands of index mutual funds and exchange-traded funds that passively track the market. That would be a boon for large ETF managers, including the iShares unit of BlackRock Inc., Vanguard Group and the State Street Global Advisors division of State Street Corp., as well as for firms such as WisdomTree Investments Inc.that focus primarily on the products.
It also could benefit such online investment advisers as Betterment, based in New York, and Wealthfront Inc., Redwood City, Calif. Such firms, often called robo-advisers, provide low-cost, automated advice on ETFs and other funds.
Among brokerages, large firms focused on affluent investors, such as Morgan Stanley andBank of America Corp.’s Merrill Lynch, already have many customers in fee accounts—which can be more profitable for them than commission-based accounts—and may end up making more money than ever. At Merrill, some clients with transactional individual retirement accounts also may switch their business to Merrill Edge, Bank of America’s online discount brokerage.
The transition is expected to be much tougher for brokerages and individual advisers that rely more on commissions and have many smaller accounts, which the industry has said may be tough to serve profitably in a fee model.
Edward Jones, the St. Louis-based firm that has more than 11,000 branch offices, plans to roll out new low-cost accounts that charge an annual fee to investors with as little as $5,000, according to James Weddle, the firm’s top executive. The low-balance accounts will offer investors a range of mutual funds and ETFs but will lack more-sophisticated features found in accounts with higher minimums. “Small accounts are an important part of larger client opportunities for us,” Mr. Weddle said.
Some brokerages that provide account custody and other services to independent financial advisers face challenges related to small commission-based accounts but also see an opportunity to expand their footprint. Such firms as Boston-based LPL Financial Holdings Inc. and Cambridge Investment Research Inc., Fairfield, Iowa, say that smaller groups of brokers, unable to afford compliance with the new rules, will seek to join firms with deeper pockets. “We see this as an opportunity to grow our assets,” said Mark Casady, LPL’s chief executive.
Cambridge expects to spend about $15 million this year to ensure that the firm’s more than 2,800 advisers comply with the rule, said its president, Amy Webber. Smaller firms may lack the resources to fund those costs, she said, forcing firms to back away from their small-balance retirement accounts.
The rule will create additional headwinds for asset managers that charge higher fees than index funds for the services of portfolio managers who actively select among individual stocks and bonds. Among such companies, T. Rowe Price Group Inc. will be helped by its solid performance and relatively low fees, said Morningstar Inc. analyst Greggory Warren, while Franklin Resources Inc., which has some funds that have underperformed, could suffer. Franklin Resources had no comment.
Insurers are among the firms that have complained loudest about the rule. Companies may see a slowdown in sales of variable annuities, a vehicle for retirement saving and income that is typically sold by advisers who earn commissions of 5% to 7% of the investment. For insurers, the Labor Department rule “will significantly impact sales, certainly for several years,” predicts Colin Devine, principal of insurance-consulting firm C. Devine & Associates.
In their communications to shareholders, some big life insurers have been upbeat about their ability to retool annuities for sale through fee-based accounts.
Annuities could become more “streamlined and simpler solutions,” Stephen Pelletier, an executive vice president at Newark, N.J.-based Prudential Financial Inc. told Wall Street analysts in February. “We are going to continue to evolve that product line, to extend the franchise and address a larger portfolio of opportunities.”

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What New Rules on Inversions and Fiduciary Duties Remind Us About November

Apr 6, 2016 | The Wall Street Journal

By David Wessel

Remember all those obituaries for the Obama presidency, the premature ones that predicted he would get nothing done in the eighth year of his presidency because of a recalcitrant Congress?
Ask Pfizer about that. Ask the investment industry while you’re at it.
Much to the consternation of Republicans in Congress and their allies, the Obama administration has displayed a substantial amount of regulatory muscle this week.
New Treasury rules restricting the tax benefits from corporate inversions–the maneuver in which a U.S. company mergers with a foreign firm and shifts its headquarters to the other, lower-tax country–disrupted the merger of drugmakers Pfizer and Allergan. Perhaps the regulations will be tested in court, but they’ve already accomplished the administration’s major objective–and will give other companies pause before attempting inversions
The Labor Department’s new “fiduciary rule”–which gives stockbrokers and mutual-fund salesmen the same legal duty that many other financial advisers already have to make investments in the best interests of their clients when selling retirement products–began to reshape the investment business even before the final rule was published.
Some would argue that these are the sorts of far-reaching policies that should be made by Congress. And Congress could, of course, change the law and undo these new rules. Indeed, the Treasury rules are a lousy substitute for a thoughtful reform of corporate tax policy. But Congress can’t seem to do anything substantial these days: It created a vacuum and the Obama administration is filling it.
Regardless of one’s views of the merits of either set of rules, this is a timely reminder that it really does matter who is elected president in November.

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Rules for Indexed Annuities Face an Unexpected Tightening

Apr 6, 2016 | The Wall Street Journal

By Anna Prior & Leslie Scism

Just days ago, it appeared that new U.S. rules on retirement-savings advice might inadvertently boost sales of an insurance-company product that has drawn criticism for its complexity and high compensation to sellers.
Instead, the final rule issued by the Labor Department on Wednesday toughens standards for advisers recommending these “indexed annuities” to retirement savers.
Buyers of these annuities receive interest income that is tied to the performance of a stock-market index, with a guarantee against losses if the market falls. They are pitched as a way for risk-averse investors to still participate in the stock market.
However, there are typically limits on how much of a big stock-market gain is passed through to annuity holders and other complexities that critics say can lead to misunderstanding among investors. The caps on the returns to investors exist partly so insurers can make enough money on the product to pay sellers commissions that typically average around a mid-single-digit percentage of the invested amount. There are also typically penalties due if an investor withdraws their money early from a contract.
“These annuities are extremely complex, so it’s rare that investors will have a good idea of exactly what they are getting,” said Mercer Bullard, a securities-law professor at the University of Mississippi who has long been a critic of indexed annuities.
However, indexed annuities are appealing to conservative, often older, investors who might otherwise put their savings into bank certificates of deposit or bonds. The annuities often pay higher interest than is available in those products in today’s low-interest rate environment, while they protect the buyer from stock market losses possible in stock mutual funds.
Such products offer “features that people really want for money they can’t afford to lose in retirement,” said Chip Anderson, executive director for the National Association for Fixed Annuities, a trade association.
The new Labor Department rule holds advisers working with retirement savings to a “fiduciary” standard, meaning an adviser must work in the best interest of a client and generally avoid conflicts, which can include sales-based compensation. To continue to earn commissions, many advisers will need to have clients sign a “best-interest contract” that includes detailed disclosure of the adviser’s compensation and obligations to the client.
That new best-interest-contract requirement is expected to crimp sales of another type of annuity that has been sold by many advisers—variable annuities, in which money isinvested on a tax-deferred basis in mutual-fund-like accounts.
By contrast, “fixed” annuities—on which the insurer pays interest—have generally had a long-standing exemption from fiduciary requirements. Observers had anticipated that exemption would continue to apply to the indexed annuities under the new Labor Department rule—and they suggested that would lead some annuity sellers to switch their focus from variable to indexed annuities.
Instead, materials distributed by the White House on Tuesday indicated that indexed annuities would no longer be exempt under the same standards as other types of fixed annuities. Rather, like variable annuities, advisers who want to sell indexed annuities will need to follow the requirements under the best-interest-contract exemption.
In the official materials about the annuity exemption that were posted online Wednesday, the Labor Department said that variable annuities and indexed annuities should be “subject to the greater protections” of the best-interest-contract exemption “given the complexity, investment risks, and conflicted sales practices” associated with them.
Mr. Bullard of the University of Mississippi applauded the change in the Labor Department’s final rule, saying Wednesday that such annuities “needed to be under the contract more than any other product because they are not subject to securities regulation and they are extremely complex, costly and often unsuitable.” Variable annuities are considered securities, just like mutual funds and individual stocks and bonds.
Mr. Anderson, of NAFA, declined to comment on the changes ahead of reviewing and analyzing the final rule.
Sales of indexed annuities have been growing at a strong clip amid market volatility and more willingness from certain types of firms, like banks and brokerages working with independent advisers, to sell these products.
Indexed annuity sales totaled about $54.5 billion last year, up roughly 13% from 2014, according to estimated data from insurance-industry-funded research firm Limra. Variable annuities, on the other hand, saw sales fall about 5% from 2014 to $133 billion last year.
In addition to commissions, agents often were awarded other incentives to sell indexed annuities, such as vacations, car leases and other perks. U.S. Sen. Elizabeth Warren (D., Mass.), a strong supporter of the new fiduciary rule, had previously criticized such practices.

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Reactions to the Labor Department’s Fiduciary Rule

Apr 6, 2016 | The Wall Street Journal

By WSJ Staff

The Labor Department announced new rules Wednesday that are expected to have a big effect on how Americans save for retirement. The regulation extends to individual retirement accounts a revamped version of the “fiduciary” standard that governs corporate retirement plans like 401(k)s.

Advisers generally will have to act in the best interest of their clients when providing investment guidance. Previously, brokers’ recommendations were only required to be “suitable”—a standard that critics say has encouraged some advisers to sell high-fee products that pay them high commissions.

Here are reactions from industry firms and associations, analysts, politicians and others on the final version of the regulation.

Cetera
Cetera Financial Group, an independent broker-dealer that works with more than 9,000 financial advisers, said that while it has been training its advisers to prepare them for the initial draft of the rule, the final rule shows that the Labor Department has listened to some of the brokerage industry’s early criticisms. “It appears the rule includes modifications that indicate the DOL has considered some of the industry’s concerns,” said Adam Antoniades, president of Cetera. “We will be studying the newly released details...and will announce a number of our initiatives to support advisers in this area in the coming weeks.” Initially, the broker-dealer had been opposed to the rule, and said in a comment letter to the Labor Department in July that the initial draft was “unwarranted” and would “lead to a number of negative unintended consequences.”

Merrill Lynch
“We are pleased that Secretary Perez and the Department of Labor staff have worked to address many of the practical concerns raised during the comment period,” said John Thiel, head of Bank of America Corp.’s Merrill Lynch unit. “Most important, we support a consistent, higher standard for all professionals who advise the American people on their investments. As we study the details of the final rule, we hope to continue what has been a constructive dialogue with the Department about how to implement a best interest standard effectively and efficiently for the benefit of our clients, advisers and shareholders.”

Sifma
One of the fiduciary rule’s most vocal opponents said it still has concerns about the Labor Department’s final draft. The Securities Industry and Financial Markets Association, an industry trade group, said it remains “concerned that the DOL’s rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done.” The group, known as Sifma, has spoken out against the rule on numerous occasions since it was proposed last year, saying it was a costly burden on firms and would curtail small-balance retirement savers’ access to financial advice. Sifma said it was still reviewing the final rule to gauge its impact.

LPL
LPL Financial Holdings Inc., which provides brokerage services to more than 14,000 independent advisers, said it was pleased with the Labor Department’s changes to the fiduciary rule. “In particular, we are encouraged by the increased time frame for implementation, the ability to easily enter into the best interest contract with our existing clients, and the freedom to recommend any assets that are appropriate to help investors save for retirement,” LPL said. The firm has generally supported the Labor Department’s efforts, saying its proposal last year was an improvement over the department’s initial draft in 2011. But its chief executive, Mark Casady, had said the rule’s initial requirements around the best interest contract, such as projecting costs, were too onerous for firms to implement. LPL added it plans to quickly implement changes required under the rule.

United Capital
The Labor Department’s fiduciary rule is an important step in providing more disclosure to investors, but “this should really be viewed as a step one,” says Terry Siman, a lawyer and a managing director with wealth-management firm United Capital Financial Advisers LLC who has supported the rule. “It takes a long time to make the cultural shifts” of moving the industry toward providing greater transparency, he said. Mr. Siman added the new rule would give retirement savers a boost by putting their interests ahead of advisers, while also empowering them to ask for more information around costs and conflicts of interest. “The consumer ultimately will benefit, it’s just going to be first and foremost the responsible consumers who know” to ask their advisers for that additional information,” said Mr. Siman.

Janus Capital
Matt Sommer, vice president of the retirement strategy group at Janus Capital Group who works with advisers to 401(k) plans, said he was surprised the Labor Department delayed the implementation of the new rule until Jan. 1, 2018, and eliminated certain disclosure requirements. Still, he added, “the framework remains largely in place. Thematically, the goal was to put clients’ interests ahead of those of advisers and nothing has changed with respect to that.”

Legg Mason
Jeff Masom, co-head of sales for asset manager Legg Mason Inc. said the Labor Department had “certainly made a lot of concessions” including giving firms more time to comply and grandfathering in existing investments. While the rule is likely to require “a lot of time and expense” from intermediaries, Mr. Masom said Legg Mason is optimistic about the impact of the rule on its business. He said the firm benefits from not offering retirement plan record-keeping services and being a “pure” investment manager with a mix of products, some of which are low-cost. “Competing with passive has always been on the table. Active managers always has to justify their fees. Nothing has changed on that front,” Mr. Masom said.

Morningstar
Scott Cooley, direct of policy research at investment-research and investment-management firm Morningstar Inc., said: “One of my fears was that people who had already had paid a commission on their retirement accounts would be moved into fee-based accounts and then have to pay 1% of assets a year after they had already paid a commission.” But the DOL has “indicated that it would have to be in the best interest of the client to shift them to a fee-based account from a commission-based account. That’s unambiguously pro-consumer.” Mr. Cooley also said that because the final rule incorporates the financial-services industry’s comments, “It will be harder for people in the industry to argue that the DOL didn’t take their feedback into account. I suspect the DOL drafted this with an eye towards potential court challenges.”

Evensky & Katz
Harold Evensky, chairman of financial-advisory firm Evensky & Katz and a long-standing supporter of the rule, said, “The DOL has indeed taken a major step toward a more secure and dignified retirement for millions of Americans.” Mr. Evensky, who champions the fee-only, fiduciary approach to financial advice and planning and sees the rule as supporting his business model, also said that “the DOL has obviously carefully listened and responded to the concerns raised by many financial service participants regarding the original proposal including easing the compliance process but maintaining a strong, legally enforceable best interest standard.” He added: “At this stage it seems that the Department of Labor’s years of effort will be a major win for investors.”

Analysts
Morgan Stanley said the Labor Department’s final version of fiduciary rules were “meaningfully softened in several aspects” from the original proposal, “which we see as good news for those companies impacted by the rules.” Most factors previously highlighted as problematic were addressed, Morgan Stanley says, while the timeline for implementation is extended. Insurers still face “higher compliance and likely litigation costs as a result of the standard.” But Morgan Stanley sees the changes in the final rule as positive for Ameriprise, Principal, Voya and Lincoln.

In an unexpected positive change for the industry, RBC Capital Markets said in a research note, the requirement that financial advisers enter into a separate fiduciary contract with customers when dealing in the retirement area got scrapped. Another positive: The Labor Department expanded the universe of 401(k) and other retirement plans that would be exempt from the new rule. The draft proposal would have covered plans under $100 million in assets, while the final rule drops that threshold to $50 million. RBC said annuity companies including Lincoln, MetLife and Prudential “would still see a negative hit to variable annuity sales—although the impact would likely be slightly less than if the draft had been left unchanged.”

Scaling back aspects of the rule will likely boost the stocks of the very firms most affected by the tighter restrictions, a team of researchers at UBS Group AG said in a research note. “While the thrust of the rule remains unchanged and we still see longer-term headwinds, we believe the rule’s softening could provide a relief rally in many of the most impacted stocks including asset managers, life insurers and [independent broker-dealers],” the UBS researchers wrote. They based their analysis on a fact-sheet distributed by the Obama administration.

“On the margin a few things were a little more positive, but the core rule will still be a net negative for traditional asset managers. It will encourage more money to flow into passives, ETFs and low-cost funds, which is not good for traditional asset management profitability,” Craig Siegenthaler, an analyst at Credit Suisse Group AG, said of his initial impression of the rule. Mr. Siegenthaler added that he expected a shorter implementation period for the rule and questioned whether the longer time frame might open the door for a new president to significantly change or pull back the regulations.

Despite “modest positive changes” for companies in the Obama administration’s new rule for minimizing conflicts of interest in dealing with retirees’ savings, investment bank Keefe, Bruyette & Woods said it thinks that litigation to block the rule is possible. Lawsuits would probably be based on Administrative Procedure Act, which governs how federal agencies propose and establish regulations, it said. Suing parties would likely claim that the fiduciary rule is arbitrary and capricious. In general, “we doubt the lawsuits will succeed,” it says. However, lawsuits focused on the generally unexpected inclusion of “indexed annuities” might have “a greater chance of success,” as the Labor Department hadn’t proposed changing their treatment last year. The firm said it thinks Congress blocking the rule is “a longshot” because “too few Democrats would vote against the president.”

Insurers woke up this morning to learn that the Labor Department’s toughened approach to dealing with retirees’ savings dollars isn’t “as onerous” as feared, Barclays equity analysts conclude. “Still, we anticipate life insurers, annuity providers, and financial advisors will likely face some downward pressure on revenues and upward pressure on expenses as a result of the new rules. The potential still exists for the financial services industry lobbyists to litigate the new DoL rules, but we would anticipate this only extends the timeframe for implementation.” Barclays says insurers most exposed to the rule are Ameriprise Financial Inc., Lincoln National Corp., MetLife Inc. and Prudential Financial Inc. Least exposed: Aflac Inc. and Torchmark Corp.

“At first blush, it appears that the DOL’s final fiduciary standard rule has been softened more than originally expected which should be viewed as a broad positive for the industry,” Isaac Boltansky, a policy analyst at Washington, D.C.-based Compass Point Research & Trading LLC, wrote in a research note. He added, however, that he still expects a legal battle over the rule and that the new standards will “usher in significant operational shifts for the retirement management industry.” Mr. Boltansky said a longer timeline for implementing changes as well as some of the the procedural changes in the rule were “incremental positives” for firms including LPL Financial Holdings Inc., Raymond James Financial Inc., Waddell & Reed Financial Inc., Ameriprise Financial Inc. and Primerica Inc.

Bing Waldert, managing director at Cerulli Associates, a research firm that specializes in the asset-management industry, said the final rule “takes a little pressure off broker-dealers. The challenge of this was going to be that if you are Merrill Lynch or LPL, or another large broker-dealer, this was going to dominate anything you did over next eight months. You would have had to direct all of your technology and project management resources to complying with this rule. It’s probably still going to be a hustle for these firms, but they have a little more time to comply.”

Politicians
Sen. Sherrod Brown, the top Democrat on the Senate Banking Committee, said the Obama administration listened to industry criticism and made changes that work for both investors and advisers. “Middle-class and working families who are struggling to save and invest for a secure retirement shouldn’t have to worry that their financial advisers aren’t putting their customers’ interest first,” he said. “It’s clear that the Labor Department considered the comments and input from stakeholders and the public to finalize a rule that protects retirement savers and creates a workable solution.”

The top Democrat on the House Financial Services Committee, Rep. Maxine Waters, praised the Obama administration for combating broker conflicts of interest that “strip $17 billion in wealth from America’s savers” annually. “Today’s announcement is a crucial step to ensuring that Americans’ retirement savings will no longer be threatened by conflicts of interest,” Ms. Waters said. “The department’s effort underscores the need for strong consumer protections that level the playing field for all workers and retirees, particularly smaller savers and minorities.”

SEC’s Michael Piwowar
Michael Piwowar, a Republican commissioner at the Securities and Exchange Commission, said the Obama administration’s rule “seems to ignore the chorus of voices that questioned whether it will restrict middle-class families’ and minority communities’ access to professional financial advice,” adding, “I am fearful that those concerns, which were widely and bipartisanly held, will prove to be true once the rule becomes effective.”

Financial Planning Coalition
The Financial Planning Coalition, a group of financial-planner organizations that has long supported an enhanced fiduciary standard, applauded the new rule and urged Congress not to dismantle it. “Based on our initial review, this rule, achieved through an inclusive, comprehensive review process, carefully balances needed consumer protections with preserved access to retirement advice,” the coalition said.

Financial Services Institute
At the Financial Services Institute, which advocates for independent financial advisers and financial-services firms and has said the new rule is unnecessary, President and CEO Dale Brown said his organization would give the new rule a full examination. “As we have said since day one, there is no compelling evidence this rule is necessary to achieve a uniform fiduciary standard, and DOL’s own analysis fails to make the case,” he said in a written statement. “We will spend the coming days thoroughly analyzing this rule to determine if it protects Main Street investors by preserving their access to affordable, objective financial advice delivered by their chosen financial advisor.”

AARP
Nancy LeaMond, an executive vice president at AARP, said: “Overall, we think it’s a very good day for consumers. We know how important retirement security is to our members. They have tremendous economic anxiety and the step that is being taken today is going to relieve them of that anxiety. They can know they are getting advice that is the best for them and not for the person selling them their products.”

Consumer Federation of America
“From our point of view, a rule that preserves the core protections but is easier for industry to implement is a win for everyone,” said Barbara Roper, director of investor protection at the Consumer Federation of America, an advocacy group that has been a supporter of a fiduciary rule. “We want financial firms to be able to operate under the best interest contract exemption. The changes that the DOL has made to make the contract easier to implement…really should address some of the industry’s biggest complaints about the workability of the rule.” She said the financial-services industry should be “pleasantly surprised that the implementation date was pushed back That was a high priority for them and something we expected. While I understand wanting to have this fully in place by the end of the administration, eight months was too short. The phased implementation that they’ve outlined in this final rule seems quite reasonable and should allay a lot of those concerns.”

Lawyers
Marcia Wagner, an attorney who specializes in 401(k) law, said: “We now are going to have a uniform fiduciary standard for IRAs and tax qualified plans for both registered reps and registered investment advisers and that’s a big deal.” She said the Labor Department “took a rule which would have been impossible to fully comply with and made a rule that is going to be difficult but not impossible to comply with—and I think that is helpful.” In particular, she said, a measure that allows brokerages to notify existing clients of the changes without requiring them to sign a contract “will save innumerable hours and expense” for those firms.

Andrew Stoltmann, an attorney who represents individuals in lawsuits and arbitration actions against brokerage firms, said in an emailed statement: “It is unfortunately a watered down version of the fiduciary duty imposed on registered investment advisors. Consider that under the rule firms can sell high fee variable and indexed annuities in IRAs and brokers can continue to recommend proprietary products. Many of the problems and abuses we’ve seen over the years in litigation and arbitration against brokerage firms have to do with exactly these sorts of activities.”

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What New Rules on Retirement Savings Mean for Investors

Apr 6, 2016 | The New York Times

By Tara Siegel Bernard

The Labor Department introduced new rules on Wednesday that will help protect Americans saving for retirement. While investors often assume the people who handle their savings are providing advice that is in their best interest, that is not always the case. Here is how things will change.
What does the new rule mean for me?
Once the rule goes into effect next year, all financial professionals who provide advice related to your retirement money must provide recommendations that are in your best interest. Acting in your best interest may seem obvious, but it wasn’t always a requirement.
The new standard applies to all financial products that can potentially land inside a tax-advantaged retirement account — including I.R.A.s and 401(k)-type plans — from mutual funds to variable annuities.
Does this rule mean that all financial advisers are now equal?
Absolutely not. Even though some may call themselves financial advisers, there are still various types of professionals with different legal requirements, expertise and credentials. It is still important that you work with an adviser who is equipped to address your entire financial picture. More on that in a minute.
What changes now, however, is that all financial professionals who provide advice related to your retirement money must act as fiduciaries, which is the legal way of saying they are required to put customers’ interests ahead of their own.
But the quality of the advice you receive can still vary based on the provider you are working with.
How do financial advisers differ?
This gets confusing, so brace yourself. Brokers are technically known as registered representatives. They are required only to recommend “suitable” investments based on an investor’s personal situation — age, investment goals and appetite for risk, among other things. But under the new rules, a broker who handles your retirement assets must act exclusively in your best interest, even if that will cost the broker some potential income.
As for the rest of your money, including regular brokerage accounts? That may still be subject to the lesser suitability standard.
To make matters more befuddling, there are some specific situations when brokers must act as fiduciaries for nonretirement accounts — for example, when they collect a percentage of total assets to manage an investment account, or when they are given full control of an investor’s account.
So does anyone have to look out for my best interests, 100 percent of the time?
Yes, indeed. Investment advisers, who generally must register with theSecurities and Exchange Commission or a state securities regulator, must put their customers’ interests first, regardless of what accounts they work with.
What happens when investors believe they have been misled?
If advisers do not adhere to the standards, retirement investors should have greater recourse to recover their money. Still, most disputes would be resolved in arbitration, not the courts, since most investment firms require that disputes be settled that way.

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‘Customers First’ to Become the Law in Retirement Investing

Apr 6, 2016 | The New York Times

By Tara Siegel Bernard

The rules governing how financial professionals handle the trillions of dollars they invest on behalf of Americans saving for retirement are about to get a lot tougher.
The Labor Department, after years of battling Wall Street and the insuranceindustry, issued new regulations on Wednesday that will require financial advisers and brokers handling individual retirement and 401(k) accounts to act in the best interests of their clients.
The government move is expected to encourage a shift of retirement funds into lower-cost investments — potentially saving billions of dollars for many ordinary investors — while setting off one of the biggest upheavals in the financial services industry in decades.
“The marketing material that I see from many firms is, ‘We put our customers first,’” Thomas E. Perez, the secretary of labor, said in an interview. “This is no longer a marketing slogan. It’s the law.”
The new regulations, which may be challenged in court, were formallyproposed a year ago by the department — which oversees pensions and retirement accounts — and were modified after hearings and industry criticism. They are not expected to take effect until next spring at the earliest.
Many consumers assume the individuals and firms investing their money are operating under the same sort of ethical and legal standards as a family doctor — someone who is obliged to provide the very best advice.
But brokers are generally required only to recommend “suitable” investments, which means, for example, that they can push a more expensive mutual fund that pays a higher commission when an otherwise identical, cheaper fund would have been an equal or better alternative.
The Obama administration, relying on extensive academic research, estimated that conflicts of interest embedded in the way many investment professionals do business cost Americans about $17 billion a year, leading to annual returns that are about 1 percentage point lower.
“It has the potential to really change the way advice is delivered to retail investors,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It is a really big deal. Revolutionary, even.”
The so-called conflict-of-interest rule covers only tax-advantaged retirement accounts and does not apply to most other investments. But it could lead to more sweeping changes across the financial services industry, making it harder for some smaller firms to do business and perhaps encouraging a further consolidation into larger companies better able to handle the detailed rules of compliance.
It is also expected to promote a shift away from commissions for individual transactions toward a greater reliance on flat annual fees for managing accounts, a move that would not benefit all investors equally.
Critics of the rule in its earlier proposed form argued that the changes would cost much more than the government estimated because they were based on an inadequate and flawed analysis.
Jules Gaudreu, president of the National Association of Insurance and Financial Advisors, whose members include insurance agents and brokers, said the organization was pleased that the Labor Department had incorporated some of the changes it suggested.
But he said his memberse still had reservations. “We remain concerned,” he said, “that the costs to implement such a complex rule will result in higher costs and reduced access to advice, service and products for retirement savers.”
For the last year, the industry has lobbied Congress to delay or kill the rule, so far without success. Before going ahead with the final rule, the Labor Department held four days of public hearings at which nearly 80 parties testified; it also received more than 3,000 comments on the proposal from consumer advocates, industry stakeholders and others.
“We heard the concerns. We listened. We acted,” Secretary Perez said. “And I think we improved the rule as a result.’’
Generally speaking, the new rules — six years in the making — would require a broader group of professionals to act as “fiduciaries,” the legal term for putting customers’ interests first. They cannot accept compensation or payments that would create a conflict unless they qualify for an exemption that ensures the customer is protected.
If brokers want to receive certain types of compensation that can pose a conflict, they will be required to offer an enforceable contract that promises to put the customer’s interests first.
The firms must also disclose any conflicts and direct consumers to a website that describes how they make money. Firms can charge only “reasonable compensation,” and they cannot offer advisers financial incentives to act in a way that would hurt investors.
In using the contract, brokers will still be permitted to charge commissions and engage in a practice known as revenue sharing, which allows a mutual fund company, for example, to share a slice of its revenue with the brokerage firm selling the fund. Companies that pay more may secure a spot on the firm’s list of recommended funds.
The rule also aims to protect investors when they roll over money from a 401(k) retirement plan to an I.R.A. Right now, because the recommendation provided is considered “one-time” advice, brokers do not necessarily have to act in the investor’s best interest.
There are piles of money at stake: Individual retirement accounts held $7.3 trillion at the end of 2015, according to the Investment Company Institute, while 401(k)-type plans had $6.7 trillion — money that may eventually be rolled over into I.R.A.s.
Secretary Perez said that government rule makers had made several changes to their last proposal in an effort to respond to the criticism and avoid creating a bias toward certain investment products. He said advisers would not be obliged to sell lowest-cost products if a more expensive product like a variable annuity made sense for a particular individual’s situation.
The industry was also concerned that simply providing educational information could set off the rule; regulators said that education would not be considered advice until a broker made a specific recommendation.
Wall Street was worried that brokers would need to provide a contract even before they began talking with a potential client. Regulators said the contract could be signed at the same time as other account-opening documents, though any advice given before the signing must still be in the customer’s best interest.
The new rules also simplify disclosures. For example, firms will no longer be required to disclose performance projections for one, five- and 10-year periods.
There are also allowances for small 401(k) plans. Under the final rules, advisers who provide advice to small businesses that sponsor 401(k) plans, or plans with less than $50 million, as well as advice to participants, can qualify for an exemption from the strictest rules.
Consumer advocates and lawyers say that a robust fiduciary rule will help thwart more unscrupulous brokers, like the one encountered by Russell Kazda, a retired mechanic, and his wife, Christine, a fourth-grade teacher in Illinois.
Their advisers took $172,000 of the Kazdas’ I.R.A. savings and put it in illiquid real estate investment trusts and later invested money in an options strategy. They ended up losing about $125,000, which prompted the Kazdas to sue their advisers.
“I could have had my fourth graders do it and they would’ve done a better job,” Mrs. Kazda said.
Andrew Stoltmann, a securities lawyer in Chicago who represented the Kazdas, applauded the changes.
“By imposing a fiduciary duty standard, this will cause the brokerage firms to self-police,” he said, protecting most people from often unsuitable investments like “nontraded REITs, variable annuities in I.R.A.s and active trading of stocks and options.”

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U.S. weakens retirement advice rule, responding to industry

Apr 6, 2016 | Reuters

By Suzanne Barlyn & Lisa Lambert

A new U.S. rule aimed at protecting retirement savers from profit-hungry brokers turned out to be much weaker than an initial proposal after the Obama administration bowed to pressure from the financial services industry.

The rule, announced by the Department of Labor on Wednesday, sets a so-called fiduciary standard for financial brokers who sell retirement products, requiring them to put clients' best interests ahead of their bottom line. The language is tougher than an existing rule that only requires brokers to ensure products are "suitable."

However, the Labor Department did compromise with the industry on a range of provisions. Unlike the draft proposal, the final rule does not restrict brokers from pushing proprietary products, splitting revenue with creators of funds they promote, or recommending risky, high-fee investments in alternative assets and certain annuities.

Brokers also got more time to implement the changes, which they said were costly and difficult. The rule will now take full effect on Jan. 1, 2018, compared with an eight-month compliance deadline in the Labor Department's initial proposal.

Knut Rostad, an investor advocate who chairs the Institute for the Fiduciary Standard, said he was disappointed that the final rule was not tougher, calling it "a major defeat for investors, period."

Some leading Republican lawmakers issued statements on Wednesday expressing continued opposition to the rule, saying it would prevent low- and middle-income Americans from saving for retirement or getting access to advice.

Several major brokerage firms said they needed time to review the implications, but that they generally supported the idea of a "best interest" rule. Industry trade groups reiterated concerns that the rule could have negative effects.

But several Wall Street analysts who cover brokerages, insurers and mutual fund companies affected by the rule said it turned out to be much less onerous than initially feared. Shares of brokerage, mutual fund and life insurance companies showed little reaction to the news.

The Labor Department "meaningfully softened" the rule, Morgan Stanley insurance analysts said, characterizing it as "good news for those companies impacted."

Wednesday's announcement caps a fierce, six-year battle involving the Labor Department, Wall Street and many U.S. lawmakers.

The Department received more than 3,000 letters about the rule and took part in more than 100 meetings. It first issued a proposal in 2010 but rescinded it the following year in response to an enormous industry backlash. A second proposal issued last year also faced criticism.

Firms have said the rule would raise compliance costs – and therefore fees – and force them to get rid of Main Street clients and small businesses that offer 401(k) plans.

The Labor Department said complying with the rule would cost the brokerage industry up to $31.5 billion over the next decade but produce even bigger gains for investors.

Some lawmakers said the Labor Department should hold off until the U.S. Securities and Exchange Commission finalizes its own fiduciary rule, which it has been crafting for years. SEC Commissioner Michael Piwowar expressed opposition to the final rule on Wednesday.

PRIORITY FOR OBAMA

President Barack Obama made a new fiduciary rule a priority for his administration last year. In a speech at AARP headquarters last year, he said Wall Street brokers were bilking retirees out of billions of dollars in savings through hidden fees and that he intended to ensure the industry put clients' interests first.

"If expecting retirement advisers to act in their clients' best interest sounds like it's pretty obvious – and it's pretty obviously the right thing to do – it's because it is," Jeff Zients, director of the White House's National Economic Council, said in a call with reporters.

For example, the draft listed types of assets that advisers could recommend to steer retail investors away from certain high-risk products. The final version eliminates that list, mostly in response to the financial industry's concerns, the Labor Department said.

Brokerages and lawmakers were also concerned about an earlier requirement that brokers sign contracts with clients at initial meetings. The document was to include investment projections, fee disclosures and other detailed information.

The contracts are required in the final rule, but can be as short as a paragraph, signed later and tucked into paperwork that customers sign when opening new accounts, Labor Secretary Thomas Perez said.

The final version also loosened guidelines on pay, 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, said Marcia Wagner, a Boston-based lawyer who advises retirement plan providers. They will have to train and monitor employees who have never been fiduciaries, and draft new disclosures for client paperwork, she said.

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COLUMN-Best-interest standard is a game-changer for IRA rollovers

Apr 6, 2016 | Reuters

By Mark Miller

A friend called recently looking for advice about her 401(k). Kate had decided to leave her job to pursue new career options, and money was tight during the transition. Should she roll over her $250,000 nest egg and withdraw some of the funds to help her through the career transition?
An adviser at a brokerage firm was proposing that she close out her 401(k) account and open an IRA that would cost three times as much in annual fees. I explained to Kate (not her real name) that this "adviser" was not acting in her best interest.
The 401(k) cost her 45 basis points annually, while the broker-managed IRA would cost 150 basis points. His proposal would cost her at least $74,000 in fees over the next 20 years, compared with $23,000 in the 401(k) - based on a simple back-of-the-envelope calculation assuming no asset growth. In all likelihood, the total fees would be far higher.
What would she be getting in return for that huge bite from her nest egg? Not much, just a mediocre mix of mutual funds and quarterly rebalancing, with no broader plan for retirement. We left the 401(k) where it is - and adjusted the investment mix to get the costs down further (around 17 basis points). That will cut her 20-year expenses even further, to around $7,400.
This type of predatory marketing underscores why the conflict-of-interest rule unveiled on Wednesday by the U.S. Department of Labor is so badly needed. The rule will impose fiduciary requirements on stockbrokers, requiring that they act in the best interest of clients whenever a tax-advantaged retirement account is involved (taxable retail accounts are not affected directly by the new rule).
The new rule, which will not be fully implemented until the end of next year, will sharply curtail the industry's pitching to persuade retirement savers to roll over their 401(k) accounts when they switch jobs or retire.
KEY BATTLEGROUND
"Any advice to do a rollover must now be in the best interest of the investor," said Kate McBride, who chairs the Committee for the Fiduciary Standard, an organization of financial professionals. "It means that many people will stay in their 401(k)s instead."
IRA rollovers are the key battleground. Nine out of 10 new IRA accounts are rollovers, according to the Investment Company Institute (ICI). The President's Council of Economic Advisers estimates that $300 billion is rolled over annually, and the cash surge is accelerating as more baby boomers retire.
Rollovers make sense if you are in a bad 401(k) plan with mediocre investment options or high costs. The best plans tend to be the large ones offered by major corporations. In 2013, plans with more than $1 billion had total participant-weighted costs of 0.29 percent of assets, compared with 1.17 percent for plans smaller than $10 million, according a study by Brightscope and the ICI.
Fees will not be the only consideration in the new fiduciary era. For example, Kate's would-be adviser could still recommend a solution with a higher cost if it is justified by the services provided. "Maybe the adviser will be providing planning services beyond what the client can get in the 401(k) - that's defensible," said Jason Roberts, chief executive officer of the Pension Resource Institute, a consulting firm that works with advisory and brokerage firms.
That would require the type of holistic retirement plan typically provided by fee-only Registered Investment Advisors - not only investment recommendations, but projections that integrate savings with other sources of retirement income, such as Social Security or pensions - and how they balance against living costs and health care expenses.
CONCESSIONS
The final rule also contains some important concessions to the financial services industry that could allow some business-as-usual practices to continue. The rule grandfathers in existing accounts that may be conflicted, requiring only a brief notification to clients of the new rule. It also allows continued sales of investment products that are inappropriate for most IRAs - such as nontraded REITs and variable annuities - as long as advisers guarantee they are putting their clients' interests ahead of their own.
Investors will need to be especially wary of something called a "Best Interest Contract Exemption." These are documents clients may be asked to sign which would waive the fiduciary requirement in some cases.
Yet most retirement savers do not understand the different business and regulatory models used in the advisory profession. A recent survey by Financial Engines, a fiduciary provider of workplace investment help, found that 46 percent of Americans think all financial advisers are already required to meet a best-interest-of-the-client standard. Among people who already work with an adviser, 41 percent could not say if their adviser was a fiduciary.
Unless you are a lawyer with expertise in fiduciary matters, I would simply refuse to sign these exemption agreements. Ask for a better, fiduciary-compliant solution or take your business elsewhere.
How to be sure? Ask any potential adviser to sign the Fiduciary Oath, a simple, legally enforceable contract created by the Committee for the Fiduciary Standard. The adviser simply promises to put the client's interest first, exercise skill, care and diligence, not mislead you and to avoid conflicts of interest. You can download the oath here. (bit.ly/1PtGy4w) (Editing by Matthew Lewis)

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Factbox - Department of Labor retirement 'fiduciary' rule

Apr 6, 2016 | Reuters

By Tariro Mzezewa

n">The U.S. Department of Labor plans to announce on Wednesday its rule requiring financial advisers and brokers to act in the best interest of retirement clients when providing investment advice.
The agency first proposed a new rule in 2010 but withdrew it in 2011 after widespread criticism from financial industry officials and lawmakers. A modified version was presented in 2015 and also met with criticism.
Here are some key provisions of the final rule, according to a White House fact sheet provided on Tuesday:
- Financial brokers must now act in clients' "best interest" when giving retirement investment advice. That is tougher than a previous standard in which they had to ensure products were "suitable" for clients.
- Firms must ban financial incentives for advisers not to act in the client's best interest.
- Firms must disclose compensation arrangements on a webpage and by making sure customers are aware of their right to all fee information.
- The rule allows firms and advisers to continue receiving the most common forms of compensation for offering investment advice to retail customers and small-plan sponsors. The rule also does not limit the types of assets they can invest in.
- Firms are allowed to sell insurance products like variable and indexed annuities under the best interest rule.
- The rule clarifies treatment of small businesses that sponsor 401(k) plans, allowing brokers to sell products and services to them.
- The rule allows firms and their advisers to recommend proprietary products.
- Education is not included in the definition of retirement investment advice, allowing advisers to offer basic information without acting as fiduciaries.
- Under the rule, financial advisers may communicate with potential clients before signing a contract. But firms must eventually tell new clients in writing that they are acting in their best interest, and any advice given before a contract is signed must be covered by the contract and meet the best interest standard.
- To give firms more time to adapt to changes, the rule will be implemented in phases. Full compliance is required on Jan. 1, 2018.
(Reporting by Tariro Mzezewa in New York; Editing by Peter Cooney)

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Stricter Rules Unveiled for Brokers Giving Retirement Advice

Apr 6, 2016 | Associated Press

By Bernard Condon

WASHINGTON — The Obama administration acted Wednesday to require that brokers who recommend investments for retirement savers meet a stricter standard that now applies to registered advisers: They must act as "fiduciaries" — trustees who are obligated to put their clients' best interests above all.
The action, in rules issued by the Labor Department, could shake up how Americans' retirement investments are handled by brokers. The anticipated release of the rules had been the target of heated lobbying campaigns from both the financial industry and consumer advocates.
"This is a huge win for the middle class," Labor Secretary Thomas Perez said in a conference call with reporters. "We are putting in place a fundamental principle of consumer protection."
The rules will be phased in starting a year from now. Full compliance will be required by January 2018.
The change could alter the types of investments — from stocks and bonds to annuities and real estate funds — that brokers recommend for people's retirement accounts. Their recommendations may soon shift away from riskier or high-commission investments.
And brokers will have to disclose any conflict of interest related to a financial product — like commanding a high fee for recommending it — that would prevent them from putting a client's interests first.
Americans increasingly seek advice to help navigate their options for retirement, college savings and more. Many professionals provide investment guidance, but not all are required to disclose potential conflicts of interest.
The management of hundreds of billions in retirement accounts like 401(k)s and Individual Retirement Accounts could be affected. About $4.5 trillion were in 401(k) retirement accounts as of Sept. 30, plus $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.
Critics of the current system say investors lose billions a year because of brokers' conflicts of interest. The White House estimates the loss at $17 billion annually.
Regulators say problems often arise when people who are retiring or leaving a company "roll over" their employer-based 401(k) account into an individual retirement account. A broker they hire to make that shift might persuade them to move their money into a variable annuity or other investment that could be risky, expensive or difficult to cash out.
The Consumer Federation of America called the government action "a historic win for consumers."
The financial industry, though, warns that the new requirements for brokers will likely reduce investors' choices of financial products and could cause brokers to abandon retirement savers with smaller accounts.
Perez said that in drafting the final rules, his department considered many of the industry's concerns and made revisions to accommodate them. The period for the rules to begin taking effect, for example, was extended from eight months as originally proposed to one year.
At ground level, the new system will force financial advisers to adapt, consultants J.D. Power says. It joins the rise of new technology such as robo-advisers — automated wealth-management services — as factors that are "causing more investors to question the value they are getting out of their advisers," J.D. Power said.
"Full-service firms will need to adapt to make a clearer case for the value they provide versus lower-cost alternatives," it said.
A strict fiduciary rule might have helped some investors who have lost retirement savings in recent years.
One of them, Susan Bernardo, 58, says about seven years ago, her broker put her money into energy and real estate partnerships without explaining the risks or the fat 5 percent commission that brokers typically earn on such deals. The portfolio, once worth $400,000, has plunged to half that.
A widow and single mother from Wantagh, New York, Bernardo is also angry that the broker put money that had been set aside for her then-3-year-old son and in variable annuities that he can't touch until turning 59½ — at least without paying steep penalties. Earnings on variable annuities can grow tax-free, but hefty fees kick in if investors withdraw cash before they reach that age.
"Unfortunately, it's a little late for me," Bernardo said of the new rules. "A lot of people have been hurt."
There have been numerous cases in recent years of abuses by brokers of their customers. In 2012, David Lerner Associates was fined $12 million by regulators for putting unsophisticated and elderly investors into risky real estate investment trusts.
And last year, UBS paid $15 million to settle charges that it had failed to supervise a former broker who had put investors into risky Puerto Rican funds.
Both companies neither admitted nor denied wrongdoing.
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AP Business Writer Bernard Condon in New York contributed to this report.
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Video animation explaining the rules: https://youtu.be/YPH1J1DmHvE

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Conflict of Interest Rule Could Save Americans Billions in Retirement

Apr 6, 2016 | Bloomberg

By Jordan Yadoo

When it comes to retirement planning, it's not just about how much you save, but with whom.
A new Labor Department rule announced Wednesday will require brokers to put clients' interests ahead of their own when it comes to retirement investments, tightening current industry standards that can incentivize brokers to push high-fee products that prioritize their own profits.
The shift could save billions of dollars annually for investors, who increasingly hold their money in self-directed individual retirement accounts as opposed to defined benefit plans or 401(k)s, according to a separate White House Council of Economic Advisers analysis issued last year.
Six years in the making, the regulation imposes a fiduciary standard on any individual receiving compensation for retirement investment advice, including brokers and insurance agents who are currently held to a lesser standard. The rule, which takes effect in April 2017 and is fully implemented by January 2018, will also require brokers to clearly and prominently disclose any conflicts of interest, like hidden fees or backdoor payments often buried in the fine print.
The rule could save investors $17 billion each year, according to the White House report that said savers lose about 1 percentage point of annual returns from conflicted advice. Currently, brokers are allowed to steer investors toward high-cost mutual funds that maximize their personal gain.
The rule follows a major shift since the mid-1970s in America's private retirement system away from defined benefit plans and into self-directed IRAs and 401(k)s.
Forty years ago, defined benefit plans based on factors such as an employee's earnings history and duration of employment accounted for the lion's share of all retirement assets, according to the White House report and data from the Investment Company Institute. Workers with such plans didn't have to worry about managing or directing their retirement savings themselves. Today, the bulk of U.S. retirement assets — over $7 trillion — are held in IRAs, compared with $2.9 trillion in traditional pensions. In 1974, $1 billion was held in IRAs and $130 billion in pensions.

That makes good investment advice especially critical today, according to Alicia Munnell, director of the Center for Retirement Research at Boston College, who co-authored a paper that was presented to the Labor Department in August. The paper described how conflicted advice significantly reduces returns on self-directed retirement accounts.
She expressed particular concern about the hundreds of billions of dollars that are rolled over from 401(k) plans to IRAs every year.
"People are being cajoled into moving their money out of a relatively low-cost, well-regulated part of the retirement system and into a relatively unregulated, high-cost part," she said in a telephone interview.
Rollovers account for the overwhelming majority of money flowing into IRAs. With tens of millions of baby boomers nearing retirement, account rollovers are poised to accelerate in the coming years, according to the White House report.
The Labor Department rule could very well slow down such transfers by requiring advisers to spell out precisely how they're in a client's best interest.
"It would be very hard for somebody who is really acting in the customer's interest to tell them to roll their money out of a 401(k)," she said. "You're not serving as a fiduciary if you're taking someone from a low-fee world and putting them in high-fee investments."

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Brokers Upended by Obama's Tough Rules for Retirement Advice

Apr 6, 2016 | Bloomberg

By Robert Schmidt & Margaret Collins

U.S. brokers managing retirement accounts must adhere to tough new standards under an Obama administration rule released Wednesday that aims to protect millions of savers from conflicted investment advice.
The Labor Department regulation, which gave the industry some concessions from an earlier proposal, puts a capstone on President Barack Obama’s efforts to rein in Wall Street and level the playing field for investors who hold some $12 trillion in Individual Retirement Accounts and 401(k) plans. For the brokerages, mutual funds and insurers that fought the plan for more than five years, it will bring compliance headaches and likely more lawsuits from disgruntled clients.
The increased obligation for brokers, known as a fiduciary duty, requires them to put customers’ interests ahead of their own. The White House contends it will collectively add billions of dollars annually to retirees’ nest eggs by eliminating hidden incentives that cause brokers to push investment products with higher fees and commissions.
“Today’s rule ensures that putting clients first is no longer a marketing slogan,” Labor Secretary Thomas Perez said in a call with reporters. “It is the law.”Potential Lawsuit
With a lawsuit challenging the rules almost inevitable, Perez and National Economic Council chief Jeff Zients stressed that the administration took into account “extensive feedback” from the industry, scaling back the proposal issued last year in numerous ways. That includes a final implementation date of January 2018, allowances for firms to recommend their own in-house products, making it easier to notify existing account holders of the new obligations and stipulating that brokers who provide educational information aren’t ensnared by the fiduciary obligation.
Companies such as LPL Financial Holdings Inc. and Primerica Inc. that manage money for individual investors rose in Wednesday trading after analysts said Labor’s final rule wasn’t as aggressive as expected. LPL surged as much as 13 percent to $26.35 and Primerica gained as much a 11 percent to $47.43.
Even with the Labor Department’s changes, financial firms have indicated they will continue fighting, both in federal court and Congress. Any litigation, some said, could focus on whether the Labor Department adequately followed rulemaking requirements such as properly weighing the regulation’s costs against its benefits.
The U.S. Chamber of Commerce will “consider every approach to address our concerns,” David Hirschmann, head of the business group’s Center for Capital Markets Competitiveness, said in a statement Tuesday.
The Labor plan is the first major overhaul of retirement savings rules since the 1970s. Back then, many workers had employer-controlled pensions and the 401(k) didn’t exist. Now, the bulk of Americans must make their own investing decisions as they contribute to IRAs and 401(k) plans.Confused Investors
The update was necessary, the Obama administration said, to add protections for consumers who are often overwhelmed by a long list of investment choices and may have had no idea that their broker could profit by offering one mutual fund over another. Those conflicts were allowed under the current standard for brokers, one that calls for investments to be “suitable.”
The White House contends that the impact of biased advice is substantial. It laid out an example of typical worker with $100,000 in retirement savings who rolls her 401(k) into an IRA at age 45. Adjusted for inflation, the hypothetical worker’s investment would grow to an estimated $216,000 by age 65 if she received appropriate guidance. But it would increase to just $179,000 with conflicted advice, the administration said.
Industry groups, who dispute the White House’s calculations, say investors would be better served by the government stepping up its oversight of the small minority of dishonest brokers. Opponents also argue that the added regulatory burden will make it too expensive to keep handling investments for low-income people who have smaller account balances.
A large group of companies fought the rule, including Wall Street banks with brokerages, mutual fund companies that thrive on IRA rollovers and insurers that sell annuities. Thousands of independent brokers and financial planners also mustered opposition.Industry Concessions
The Labor Department said its final rule responds to some industry objections. For instance, a new required contract that discloses conflicts can now be signed by a client when an account is opened. Firms complained that the proposal called for the contracts to be signed when a potential customer walked in the door.
The regulation will have the broadest impact on IRAs, as the number of 401(k) plans affected by it was shrunk in the final version.
Another tweak benefits brokers who recommend less-liquid holdings, such as real-estate investment trusts that aren’t publicly traded. The proposed rule could have prevented the sale of such assets.
Perez stressed that it is not Labor’s goal for brokers to put their customers in the cheapest products.No Yugos
"The Yugo may be the lowest-priced car, but it ain’t a very good car," he said.
While it is not fully clear how financial firms will readjust their businesses, some have already moved to get in front of the policy. That is especially true of insurance companies, which sell types of annuities that have long been criticized by investor advocates for having steep commissions and high fees.
American International Group Inc. and MetLife Inc., for example, recently announced the sales of their brokerage arms. The fiduciary regulation was a “big factor” in AIG’s decision, CEO Peter Hancock said in January.
Others, consultants said, may be behind the curve. Surveys conducted by Deloitte show many companies were waiting to see what the final rule would demand before initiating any changes to their business practices, said Julia Kirby, a director of the firm’s regulatory advisory group.

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VIDEO: New U.S. Labor Department Rule Puts Retirees First

Apr 6, 2016 | Bloomberg

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US makes concessions on retirement advice fees

Apr 6, 2016 | The Financial Times

By Stephen Foley

The investment industry has wrung a series of concessions from the Obama administration in new rules that the White House says will save US retirement savers $17bn a year in hidden fees, outsize commissions and poor returns from conflicted financial advice.

A “fiduciary rule” designed to raise the standard for retirement advice is due to be published on Wednesday, and administration officials signalled that they had scrapped contentious details which the industry had said would make the new regulations unworkable.

Commission-based brokers will be given wider latitude to recommend illiquid or complex financial products, and will have to give fewer cost projections than envisioned in a draft rule that was published last year to outrage from industry executives and lobby groups.

Nonetheless, the new rule looks set to reshape large parts of the investment landscape, holding broker-dealers and advisers to a fiduciary standard that requires them to put clients’ interests above their own.

The rule will make it much more onerous to take commissions on the sale of financial products, pushing more people into low-cost index tracker funds and threatening the viability of complex insurance products such as variable annuities.

The Department of Labor has been working on the new rule for more than six yearsin the face of objections from the industry, which says that small savers could be left unable to obtain financial advice if compliance costs soar for broker-dealers and product advisers.

Many financial professionals in the US are required only to recommend products that are “suitable” for a client, rather than to pick the best product.

“If you had cancer you wouldn’t want your doctor to tell you what was suitable for you,” said Labor secretary Tom Perez. “You would want your doctor to tell you the best plan to save your life.”
Winners and losers of the fiduciary rule

Mr Perez insisted that the DoL had listened to feedback from the industry, and concessions were designed in part to limit the risk of a legal challenge to the rule.

The administration said advisers could continue to receive revenue-sharing payments on products they had already recommended, a “grandfathering” provision lobbyists had demanded.

The industry will also be given more time to prepare for the new rule, which will come into effect in phases, with full implementation delayed until January 2018.

The US Chamber of Commerce, however, signalled it had not taken the idea of a legal challenge off the table.

“We will review the rule to determine if it disadvantages small businesses, limits access and choice to investment advice, or makes saving for retirement more expensive,” said David Hirschmann, head of the chamber’s centre for capital markets competitiveness.

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Wall Street Dodged a Bullet on the Retirement Fiduciary Rule

Apr 6, 2016 | Fortune

By Joshua Brown

The industry is 5 years ahead of regulators.

I spent yesterday at the Tiburon CEO Summit in lower Manhattan rubbing elbows with some of the most powerful people in the wealth management industry. But the name on everybody’s lips was actually an acronym: DOL.

The Department of Labor’s final “fiduciary rule,” on conflicts of interest in retirement savings, then just 24 hours away from being released, hung over the conference proceedings like a soupy fog. We all took turns describing what the shape of it might be and enumerating the potential impact to each other’s business models, like the proverbial blind men sizing up an elephant.

For the last year or so, the industry has been bracing for the new rule, expecting a punch in the face that would force a dramatic overhaul of how they dealt with their customers, and complaining loudly and often dishonestly about how much it would hurt them. Instead, they received a love tap, in the form of the rules announced by the Department of Labor today. Stocks like Ameriprise AMP 1.45% and LPL Financial LPLA 1.07% , two of the brokerage firms that were said to have been most vulnerable, gapped higher as the details hit early this morning.

The industry and its lobbying groups haven’t had much to say about the rules so far, although that will probably change. All things considered, and in comparison with the rules as originally proposed last summer, they got off incredibly easy. In fact, the rule dovetails pretty nicely with changes that many companies on Wall Street have already been implementing for at least the last five years.

The rule doesn’t change very much on the ground. Existing accounts are largely left untouched and previously conducted transactions with the public will not require a lookback. The firms have years to get into compliance with the rule for new accounts and customer dealings, and the implementation will happen in phases.

Mutual fund families, retirement plan architects, broker-dealers, insurance companies and the registered reps in the trenches will all sleep easily tonight. Virtually all of the products they sell, where conflicts are a given, will still be allowed under the new rule so long as additional disclosures are made and a “Best Interest Contract Exemption” or BICE is signed off on by the client. This will be no trouble at all: Just picture the speed with which you click “Agree” everytime iTunes does a software update, and you can imagine how little of an impediment this sort of thing represents. Existing clients who’ve already been sold a product that requires a BICE will merely need to receive a written notification rather than have to repaper their accounts.

Some of the big items the industry was most concerned with became non-events. There will not be a bias toward lower-cost funds vs higher-cost funds, so long as a justification can be made for their being recommended (quality, performance, etc). Advisors will still be able to sell the proprietary products of their own firm so long as they can enunciate the reason why these products are in their customers’ “best interests” – a hurdle whose height will probably be adjusted on a case-by-case basis as no one really knows what it means yet.

The rule will only be applicable for retirement assets. It’s been estimated that there are currently $1.7 trillion worth of IRA assets that hold products requiring the contract exemption to a fiduciary standard. Handling 401(k) rollovers may become less profitable, as there will be a real test for brokerages and advisories to be able to make recommendations that are a better option than what clients already had in place. It should be noted that this retirement account scrutiny will also apply to fee-only advisors who are already held to a fiduciary standard under current regulations. Rolling over a 401(k) account where the participant is paying an all-in cost of 60 basis points into a wrap account charging 1.5% will not exactly be a slam dunk going forward.

You’ll probably see fewer annuity sales, especially in those cases where there’s absolutely no legitimate need for an annuity other than the broker feels like paying himself a 7% commission on someone’s money that week.

Firms and advisors will still be able to say “hire me” without the marketing being held to a fiduciary test. The same will apply to general market commentary and public appearances, so long as individualized advice is not being given in that forum.

Overall, the industry will be fine. Business models will adapt, behavior will be nudged further toward fiduciary-like practices, and the public will probably be somewhat better off in the end. Lawsuits will ensure compliance, as will the glare of the spotlight that will accompany the rule’s implementation as it phases into law. Assuming the industry lobby doesn’t look a gift horse in the mouth, the whole thing could happen within 60 days with the phase-in period beginning in 2017.

And here’s what I think is the main point: The market has already been moving in this direction for the better part of the last decade. Consumer preference, advisor choice and the power of the internet have been driving many of the reforms needed, way in advance of what the Department of Labor released today. The new rules just speed up several industry mega-trends–the move toward pay-for-advice instead of pay-per-transaction, the mass exodus from expensive funds into cheap index products, the growth of the independent advisor versus the shrinkage of the brokerage channel.

We were heading toward a de facto fiduciary standard regardless. The DOL’s rule, assuming Congress or the next president doesn’t block it, carves out some exemptions that let brokers and insurance companies hold onto a bit more of their ground than they otherwise would have, for a little bit longer.

For this reason, I would say the biggest winners here are lawyers, followed by some consumers, followed by the advisory firms who want to go fiduciary (they all do) but just needed to buy more time to make the transition. Now they’ve got time and the ability to hang onto a few key profit centers thanks to the exemptions that have been “streamlined” into the final rule.

It’s a workable solution that the industry can live with. Perhaps the best thing to come out of it will be an increased awareness among the public and a change in attitude among the professionals who serve them. If that is the case, you can chalk this up as a minor win for everyone.

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Fiduciary Light

Apr 6, 2016 | Forbes

By Frank Armstrong III

The Labor Department (DOL) took action because the Securities Exchange Commission (SEC) wouldn’t. So, today we have Fiduciary Light from DOL.
I’ll admit, even though billions of dollars are at stake, there is no better way to put an audience to sleep than to explain the difference between fiduciaries and sales people. But, this is important and easy. So, try to hang in there with me.

What’s a Fiduciary?
A fiduciary works for you and must act in your exclusive best interest. That’s pretty simple, right? The fiduciary standard is the highest standard of care for investors. We have had fiduciaries since the knights ran off to the Crusades and left a caretaker in charge of their holdings. A large body of law over 1000 years dictates the standard. We know what fiduciaries are supposed to do.

What’s a Salesman?
On the other hand, a salesman is employed by a company to sell stuff to you. In the case of security and insurance salesmen the fiduciary standard does not apply. They are held to a much lower standard of “suitability”. In plain English that means that unless the transaction is bad enough to gag a maggot, it’s OK. Buyer Beware!

What’s the problem?
A few examples: It’s OK to recommend the most expensive mutual fund with the highest commission to you without disclosing that better and cheaper alternatives might be a better solution. It’s also OK to recommend a bond that the parent company wants to get rid of, or where they are participating in an underwriting, or a product where the parent company has enhanced incentives to push. None of this is in your best interest. That’s pretty simple, too. Right?
Fiduciaries must disclose all the relevant costs and any potential or real conflicts of interest. Sales people need not. That’s pretty simple, too. Right?

Who is a Fiduciary?
So, who is a fiduciary? A firm registered solely as an SEC Registered Investment Advisor is a fiduciary all the time in every transaction and every recommendation. Very simple.

Who is not?
A stock broker, Registered Representative of a broker dealer, or Insurance salesman is not a fiduciary. Even though they masquerade as Advisors, Consultants, Vice Presidents, Financial Advisors or any of dozens of titles, you can reliably tell them by the FINRA designation on their cards and/or letterheads. Simple, Right?

The Grey Area
Now it gets tricky. If the that same person is dual registered as a registered representative (RR) and or an investment advisor representative (IAR) , you can never tell what role he/she is playing. They can and do change hats in an instant. During any dispute, either litigation or arbitration, their first line of defense is that they were not fiduciaries in the transaction.

Enter the DOL
The DOL got fed up watching pension participants be victimized by unscrupulous sales people. Abuses were plenty. As an example, salespeople induced people to leave a perfectly good pension plan to rollover into a much higher cost IRA to line their own pockets. IRAs were consistently stuffed with high cost investment options.
Because the SEC was simply AWOL on the issue DOL propagated their own fiduciary standards for pensions, IRAs and IRA rollovers. It is a step forward and will prevent a number of abuses. Unfortunately, the new regulations add a new layer of complexity and further confuse the line between fiduciaries and sales people. The list of exceptions to fiduciary requirements is enough to make your head spin. The SEC should have ruled, and they should have gone much further.
I’m not interested in a blanket smear. Let me be perfectly clear, there are plenty of very ethical professional stock brokers and registered representatives. And there are reasons why you might want to do a transaction with a stock broker or registered representative. For instance, if you wake up inspired to sell your Ford stock and buy GM, you don’t need fiduciary advice.
Also, let’s be clear that not every Investment Advisor is pure as the driven snow, or even particularly bright. There is no guarantee of competence or integrity that comes with the Registered Investment Advisor designation. So, while they are held to dramatically higher standards by law you must still choose carefully.

What to do?
If you need financial planning advice beyond a simple self-directed transaction, you ought to have a fiduciary that’s looking out for you. And, a firm solely registered as a Registered Investment Advisor must ALWAYS act solely in your best interest. It works for pensions, pension rollovers, IRAs and all of your other accounts. That’s pretty simple.

On the other hand, the DOL Fiduciary Light doesn’t quite cut it, and it’s not simple.

Disclaimer: My firm is a solely SEC Registered Investment Advisor

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How the fiduciary rule works

Apr 6, 2016 | CNBC

By Sharon Epperson

You may have assumed that the financial professional you've relied on to advise you on your retirement savings had your best interests at heart.
That was not always the case.
Individual investors have more than $24 trillion in retirement savings, including $7 trillion that's stashed away in Individual Retirement Accounts, or IRAs. A new rule announced Wednesday by the Department of Labor is going to change the way people get advice on how to invest that money, by holding investment professionals to what is called a "fiduciary standard."
Here are three important things you need to know:What the change means
The Labor Department, which regulates tax-advantaged savings accounts, is bringing more investment advisors under an already existing rule known as the "fiduciary standard," which requires financial advisors to put their clients' best interests ahead of their own profits.
As of now, only financial professionals and firms registered as investment advisors with the Securities and Exchange Commission or individual states follow that rule. Brokers, insurance agents and most other financial professionals are held to a "suitability standard" which gives them significant wiggle room. That means they only need to make investment recommendations that are suitable for their clients, but not necessarily the best option.
Who's impacted?
The rule covers all financial professionals offering investment advice for retirement accounts — including 401(k)s and IRAs. Under the new rule, your advisor must follow the "fiduciary standard" in recommending investments for your traditional or Roth IRA, suggesting investments when rolling over 401(k) assets to an IRA or helping you set up a solo 401(k), SEP-IRA, or simple IRA if you're self-employed. However, an advisor recommending investments for a taxable brokerage account does not need to adhere to the rule.
What happens when
The broader definition of fiduciary will take effect in April 2017, according to the DOL. Until then, if you are not sure which standard your financial professional follows — make sure you ASK!

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Obama administration targets financial advisers better at enriching themselves than clients

Apr 6, 2016 | MarketWatch

By Elizabeth O'Brien

The Department of Labor today released long-awaited regulations that could make big changes to the way retirement advice is delivered throughout the country.
The regulations, scheduled to go into effect by Jan. 1, 2018, have been closely watched and debated within the financial services industry even as they remain largely unknown to the investing public they are meant to protect. “Regular consumers have no idea that this is even happening,” said Jamie Hopkins, retirement income professor at the American College of Financial Services.
Now is a good time for investors to get up to speed. The new protections, called fiduciary regulations, will require financial professionals to put their clients’ interests before their own financial gain when offering individualized retirement advice.
While that might seem like a given, many financial advisers were previously held to a lower, so-called “suitability standard” that required them only to sell products that were suitable enough for the client. Brokers who sold products on commission could legally steer clients to a mutual fund that paid the broker more than a fund that might have been a better option for the client, as long as the product was “suitable” for the client.
“I think it has the absolute potential to be huge and game-changing,” said Knut A. Rostad, president of the Institute for the Fiduciary Standard, who said he would closely watch the government’s enforcement of the new regulations.
The regulations center on individual retirement accounts (IRAs) and the financial professionals who advise investors rolling over their former company 401(k) into an IRA or setting up a new IRA from scratch. IRA investors are particularly vulnerable to conflicted financial advice, which collectively costs retirement savers some $17 billion a year, according to a report from the White House Council of Economic Advisers.
The regulations don’t ban commissions outright, but they require financial professionals who accept them to disclose the terms of their compensation to the client. That requirement might prove awkward and onerous in practice and cause firms to move away from commission-based models, some experts say.
Registered investment advisers have already been held to a fiduciary standard. These advisers are typically compensated by either a flat dollar amount or by a percentage of assets under management. Many investors aren’t clear on these distinctions among advisers, who call themselves all manner of titles, from wealth manager to financial planner.
Opponents fear that the regulations will increase compliance and other costs for financial services firms, making it too expensive for them to serve their lower-balance customers and leaving those investors priced out of the market for advice.
To fill the void, many experts predict the regulations will fuel the rise of so-called robo-advisers, or firms that offer automated portfolio construction and management for a lower fee than a traditional professional adviser.
The regulations will likely face legal challenges, experts say.

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Labor Department Rule Sets New Standards For Retirement Advice

Apr 6, 2016 | The Washington Post

By Jonelle Marte

The Labor Department released more details Wednesday about a long-awaited rule that would set limits on the advice that brokers can offer to retirement savers.
Under the “fiduciary rule,” which has been in the works since 2010, brokers selling investments to retirement savers would be required to put the client’s interest ahead of their own. The sweeping rule change would create a higher standard than the current regulations, which only require that brokers recommend investments that are “suitable,” even if it may not be the client’s best option.
“This is a huge win for the middle class,” said Thomas Perez, secretary of the Labor Department. “In far too many places and on far too many issues, the rules no longer work for working people.”
Proponents of the rule say the change will lower investment fees for retirement savers, making it possible for them to keep a bigger share of their returns. The change should reduce their chances of being directed into costly products when simpler and more affordable options are available. For the typical retirement saver, the change could lead to more of their money being held in low-cost and index-based investments. Some people could be moved from accounts where they are paying commissions for each transaction to accounts where they are charged a fee that amounts to a percentage of their assets, analysts predict.
The rule is meant to improve disclosures and to reduce conflicts of interest. For instance, there may be cases when a firm is paid by a third party such as a mutual fund company for recommending a particular investment. Conflicted investment advice costs savers $17 billion a year, according to an estimate from the White House Council of Economic Advisers. While the new rule won’t ban commissions, brokers may have to explain why they are recommending a particular product when a less expensive option is available, and they could face scrutiny if they recommend complicated products.
But some industry pros have said they were worried the change could increase paperwork and limit options for savers with small or modest account balances. Some firms facing higher costs because of the new rules may decide that it doesn’t make financial sense to work with savers who have small account balances if they see a cutback in the fees they earn for working with those clients. They may also move away from those accounts if they worry the accounts may lead to more regulatory scrutiny, analysts say.
The rule won’t affect people saving through 401(k) plans, which are already subject to fiduciary rules. Educational information offered to retirement savers about types of investments would also still be allowed. But investment firms consulting savers on whether they should keep their money in a 401(k) or roll them over into an individual retirement account (IRA) would be required to meet the new standard on any advice they offer.
While the rule would go into effect in April 2017, financial firms would have until January 2018 to get into compliance. Some firms may decide to move investors from commission-based accounts to fee-based accounts, where funds may be managed by a financial adviser and an investor’s costs may be structured as a percentage of assets invested, instead of a fee per transaction, according to a report released in October by the fund research firm Morningstar. Those accounts are already subject to fiduciary standards but may raise costs for investors who rarely make trades and are more likely to hold on to investments for the long term.
Some analysts estimate that the rule has the potential of driving more money into low-cost index funds, which have already been gaining in popularity as more investors become conscious of the fees they pay and skeptical of the ability of fund managers to beat the broader market. The shift could also encourage more people to use discount brokerages or online investment accounts dubbed “robo-advisers,” which typically use algorithms to help people create portfolios, according to Morningstar. The online options can often be more affordable than working with a financial adviser, in part because they often using index-based investment options. But some critics say investors who take that approach may need to become more involved with managing their portfolios.

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White House locks in new rules for financial advisers

Apr 6, 2016 | The Hill

By Peter Schroeder

The Obama administration on Wednesday unveiled new rules for retirement investment advisers, turning aside pressure from industry groups to abandon the proposal.
The regulations, which were issued by the Labor Department, establish requirements that the White House says will save Americans billions of dollars by combating bad behavior on Wall Street.
“A little over a year ago, the president called for action to crack down on conflicts of interest in retirement advice. … Today, we reached a crucial milestone,” said Jeff Zients, director of the National Economic Council, in a Tuesday call with reporters.
“It ensures that retirement savers get investment advice in their best interests so they can grow their nest egg.”
The regulatory initiative imposing a “fiduciary duty” standard on retirement investment advisers has been years in the making.
The financial industry has fought tooth and nail against the regulations, arguing they will impose a massive burden on financial firms and make it harder for less wealthy Americans to obtain expert financial advice.
Administration officials insist that they have taken industry feedback into account since last proposing the rule one year ago, and argued that any lingering criticism, including from high-ranking Republicans like Speaker Paul Ryan (R-Wis.), should not be taken seriously.
“We’ve adequately addressed those and then some,” said Labor Secretary Thomas Perez. “Are you for consumers, putting their best interests first, or do you think that the only way financial advisers can provide advice is to put their financial interests first?”
The now-finalized rules mark one of the largest regulatory undertakings for the Labor Department under Obama, as the most recent comment period spanned five months, generated 3,000 comment letters and involved over 100 meetings.
Under the new rules, most investment advisers for retirement plans will have to meet a “fiduciary” standard, requiring them to put the interest of their clients ahead of any others. And if they don’t, clients would have the ability to file lawsuits against them.
White House analysis found that conflicted advice can cost Americans up to $17 billion a year, and can drive down investment returns for middle and working-class Americans by a full percentage point.
Under the final rules, advisers will not be able to receive compensation that could result in conflicting advice; for example, they will be barred from steering clients toward an investment if that a company has paid them to promote.

However, advisers will still be able to receive payments from investment providers like commissions, so long as they have in place procedures to eliminate conflicts of interests and disclose potential conflicts to clients.
The regulations also streamline earlier requirements. For example, they give advisers a flexible time frame to present a contract outlining any potential conflicts, after industry groups raised concerns that advisers would have to present such paperwork before even beginning a conversation with a potential client.
Furthermore, the regulations scrap the idea of requiring firms to provide projections for possible investments, amid concerns such a system would be difficult and expensive to implement. And investment advisers do not have to meet as strict of data retention requirements as originally envisioned in the proposed rule.
In the original proposal, the Labor Department suggested an eight-month window to fully comply with the new rules. That window has now expanded to at least one year, but full compliance is not required until the beginning of 2018.
While the rules may finally be done, the fight over them is only beginning.
Groups in the financial industry could mount legal challenges to the regulatory effort, and some members of Congress are exploring legislative ways to change them.

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What it means for investors: Rules for financial advisers are changing

Apr 6, 2016 | USA Today

By Lisa Kiplinger

A big change for investors is set to come down the pipe Wednesday. That's when the Department of Labor unveils the final version of its long-awaited fiduciary rule, which is designed to ensure that investment advisers are putting their clients' interests ahead of their own when it comes to fees and investment choices. Liz Davidson, CEO of financial education companyFinancial Finesse and the author of What Your Financial Advisor Isn't Telling You, helps fills in the blanks for investors ahead of the ruling.
Q: What does the rule mean?
A: Under the Department of Labor’s fiduciary rule, financial advisers providing investment advice for retirement accounts (including employer-sponsored retirement accounts, Individual Retirement Accounts and even many Health Savings Accounts) will now be subject to a fiduciary standard, which requires them to put the client’s interest first, rather than the looser suitability standard that simply requires that an adviser have a “reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through reasonable diligence.”
A fiduciary standard, on the other hand, requires the adviser and the company to act with the care, skill, prudence and diligence that a prudent person would exercise based on the current circumstances. Both the firm and the adviser must avoid misleading statements about fees and avoid conflicts of interest. This is great news for consumers. The end result is that the new rule will now align the interests of both the investor and the adviser and put them on equal footing when it comes to all the information they both need to make the best decisions.
Q:How do I know if my investment adviser is a fiduciary?
A: Ask to see a fiduciary agreement in writing. If your adviser is compensated even partly from commissions from investments they sell you, they’re probably not acting as a fiduciary. The DOL offers this guide for consumers on how to tell if your adviser is a fiduciary. Some examples of personal financial advisers that are already acting as a fiduciary whose status can be verified online are Registered Investment Advisors(RIA) and “Fee-Only” professionals who are members of NAPFA (the National Association of Personal Financial Advisors). Some retirement plan advisers who offer employee benefits already act as fiduciaries, as do CFP professionals when offering financial planning advice. However, many CFPs work for brokerage firms who follow the looser “suitability” standard when it comes to investment advice.
Q:What will be the effect on fees?
A: The expectation is that advisers required to act as fiduciaries will recommend lower-fee investments to their clients. The DOL has estimated that this will save investors up to $40 billion in fees over the next 10 years. The practical implication of the fiduciary standard is that when choosing between two otherwise very similar investments, a fiduciary would choose the one with the lower costs. This is very helpful as the structure of much of the financial services industry is full of inherent conflicts of interest that don’t always favor consumers.
Q:Will this new rule be hard on advisers?
A: This rule isn’t much of change for advisers who already hold themselves to the fiduciary standard, and will not have a big effect on their business model (but could lead to some compliance and paperwork changes). For those who are new to following the fiduciary standard, there could be a lot of long-term benefit to advisers here in that customers will now know that the adviser is legally and ethically required to work in their best interest, which fosters greater trust in their guidance and can lead to a more fruitful relationship for both over time. For advisers whose business model depends on high fees and commissions, the rule is going to be disruptive, and those advisers may want to look at this rule as an opportunity to adapt their business model to one that serves the best interest of the consumer, or face losing clients to the myriad more transparent and lower-cost options out there.
Q: How will it affect the average investor?
A: The fiduciary rule will have a positive effect on the average investor because it now places that investor and the adviser on the same side of the table. Investors should see their costs go down over time and their trust in advisers go up as they experience more transparency in fee and compensation disclosure, and know that the adviser is held to a recognized legal standard to uphold the investor’s interest over their own. Investors who don’t meet the minimum account standards for traditional advisers still have many great, low-cost options. Those investors may want to consider working with a financial adviser that charges a flat hourly, monthly, or annual fee instead of an asset-based fee. Another option is one of the new “robo-advisers” that typically charge lower fees and have lower asset minimums. Many reputable online investment firms, such as Vanguard, offer low-cost investing and inexpensive telephone guidance from financial planners. Investors who have unbiased financial wellness programs as an employee benefit can also get free financial education and guidance to help them make their own investment decisions.

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New rules force financial advisers to do what's best for their clients

Apr 6, 2016 | USA Today

By Robert Powell

Six years in the making, rules to force financial advisers to do what's best for their clients — rather than themselves — are finally a reality, and they could potentially save investors $40 billion over 10 years, according to the Labor Department.
The department on Wednesday unveiled its new rules designed to protect owners of retirement accounts — including for the first time IRAs — from stockbrokers, insurance agents and other types of financial advisers who "put their own profits ahead of their clients' best interest.”
The rules — which are set to go into effect starting next April — require retirement advisers to meet a higher "fiduciary" standard when selling investments (mutual funds) and products (variable annuities) to retirement account owners. In the past, many advisers had to abide only by a suitability standard.
"The DOL has indeed taken a major step toward a more secure and dignified retirement for millions of Americans," says Harold Evensky, chairman of Evensky & Katz/ Foldes Financial. "It seems that the Department of Labor's years of effort will be a major win for investors."
Under the Labor Department’s definition, any person — be they a broker, registered investment adviser or insurance agent — paid to give advice to a plan sponsor (an employer with a retirement plan, for instance), plan participant or IRA owner is a now considered fiduciary. The new rule would also apply to advisers who help workers decide whether to roll over their money from an employer-sponsored retirement plan, such as a 401(k) or 403(b), to an IRA.
Proponents have praised the new rule but suggest it might take some time for investors (and advisers, too) to understand the consequences. “The key issue is that the Labor Department rule puts investors in charge, but investors may not yet know it,” says Knut Rostad, president of the Institute for the Fiduciary Standard.
Meanwhile, opponents of the new rule, including Rep. Scott Garrett, R-N.J., weren't pleased. Critics say the cost of advice will rise and that there will be fewer advisers serving an ever-growing number of people who need help with their investments and retirement plans. "Washington doesn’t need to put another roadblock between people and their financial goals," Garrett said in a statement. "By ignoring the advice of the SEC and Congress, the DOL’s rule will increase the cost of retirement advice for lower- and middle-income Americans while creating a preferred class of rich investors."
Proponents, however, say the new rule will change the advice industry/profession for the better. Robo-advisers will likely start to serve the needs of investors who want low-cost advice that complies with the new fiduciary rules and who aren’t necessarily being served by advisers today. Brokerage firms will likely launch more fee-based accounts and start selling no-load variable annuities. Plus, it’s likely advisers who largely earn a living by not acting in their client’s best interest will exit the business.
Exemptions exist. According to the Labor Department, being a fiduciary simply means that the adviser must provide impartial advice in their client's best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected.
In essence, advisers when selling commission products and investments must document to clients that they are acting in their best interest.
Carve-outs. The new rule carves out education from the definition of retirement investment advice. That means advisers and plan sponsors can continue to provide general education on retirement saving across employment-based plans and IRAs without triggering fiduciary duties.
Recourse available. If advisers and firms don’t adhere to the standards, the Labor Department says, retirement investors will be able to hold them accountable — either through a breach of contract claim or under the provisions of ERISA.
Resistance likely. The new conflict-of-interest/fiduciary rule will face resistance in the form of lawsuits and legislation designed to block it from becoming a reality. Critics say the cost of advice will rise and that there will be fewer advisers serving an ever-growing number of people who need help with their investments and retirement plans.
Change for the better. That may be true, but proponents also say it’s possible the new rule will change the advice industry/profession for the better. Robo-advisers will likely start to serve the needs of investors who want low-cost advice that complies with the new fiduciary rules and who aren’t necessarily being served by advisers today. Brokerage firms will likely launch more fee-based accounts and start selling no-load variable annuities. Plus, it’s likely advisers who largely earn a living by not acting in their client’s best interest will exit the business.
10 things to consider about the new rule
1) The new rule applies only to retirement accounts, not taxable accounts. If you have taxable accounts with your adviser, he or she may not have to act as a fiduciary with respect to those accounts. If you have a traditional stockbroker with just a Series 7 license the “advice” they give need only be suitable. Plus, they can still get a commission on the sale of investments and insurance products in taxable accounts.
2) Advisers who are registered investment advisers (RIAs) regulated by the Securities and Exchange Commission already have to act as fiduciaries, in the best interest of clients, with respect to investment accounts, including IRAs. And RIAs who give advice to 401(k) plan participants are already regulated by Labor Department under a law commonly referred to as ERISA. The new rule extends ERISA to include retirement accounts other than employer-sponsored retirement plans, such as IRAs and Roth IRAs.

3) Advisers can still receive commissions on the sale of investment and insurance inside an IRA if they can demonstrate that the investment or insurance product is in the client’s best interest. Be prepared to sign a lot of paperwork.
4) Investors should expect or require four things from their adviser in this brave new world, says Rostad. Any adviser must 1) affirm fiduciary status in their advisory agreement in writing, 2) estimate in writing all fees and expenses for the upcoming year and an accounting of the prior year’s fees and expenses the client paid and the broker / adviser or firm received, 3) provide a list of conflicts and a written description of how conflicts are managed, and 4) affirm there will be no proprietary products or principal trading.
5) Expect to see more no-load investments and products.
6) In some, but not all cases, advisers will charge more for their advice. Ask your adviser how much they are charging and for what service and/or product.
7) An adviser might, in some cases, “fire” their small retirement account clients. If this happens to you, don’t despair. They may be doing you a favor, says Rostad. “Either a discount broker or a robo or an hourly fee-only adviser is likely to provide greater guidance and education or advice at a far, far lower cost,” he says.
8) Don’t fret if there are fewer advisers serving investors after the rule is fully implemented. “Immediately, perhaps, there may be fewer salespersons who recommend products,” says Rostad. “But going forward, there will be a greater number of true advisers relying on better technology providing higher-quality advice.”
9) What’s the worst-case scenario for investors? Short-term inconvenience.
10) What’s the best-case scenario for investors? “Far, far higher-quality advice,” says Rostad.

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Retirement Savers Get New Legal Protections

Apr 6, 2016 | Kiplinger's

By Elizabeth Leary

In a long-anticipated move, the U.S. Department of Labor on April 6 unveiled a final rule that raises the bar for investment advice provided to retirement savers. Under the rule, essentially anyone providing investment advice on a retirement account in exchange for compensation must act as a fiduciary, meaning he or she must put the investor’s best interests ahead of his or her own.
Plenty of advisers to retirement accounts already must act as fiduciaries. Registered investment advisers – people who give advice on or manage investments and are registered with a state regulator or the Securities and Exchange Commission – are always held to a fiduciary standard. Brokers, who typically perform the same functions as registered investment advisers but are regulated and licensed differently, generally need only recommend investments that are “suitable” for clients (a lower standard than the fiduciary standard), though they must act as fiduciaries in some situations. The new rule plugs some holes so that anyone who offers advice on retirement accounts falls under the stricter standard.Advertisement
The Consumer Federation of America applauded the DOL move. In a news release, Micah Hauptman, a financial-services lawyer with the CFA, said: “It appears that the rule properly closes the loopholes in the current rule so that financial professionals can no longer evade their obligation to serve their customers’ best interest…This rule will lead to better outcomes for retirement savers and bring them one step closer to a secure and dignified retirement.”Advertisement
The new rule also raises the bar even for advisers who already act as fiduciaries because the DOL’s standard has sharper teeth than the existing legal standard. Under the existing standard, advisers can recommend investment options that pay them a greater commission as long as they disclose the conflict of interest. Under the new rule, advisers and brokers can still receive commissions, but their firms are required to take proactive steps to reduce (not merely disclose) the resulting conflicts of interest. Exactly what steps they’ll need to take and exactly how this might change the compensation structures of brokers and advisers isn’t totally clear yet, but some compensation practices may be changing. The rule also limits providers to charging “reasonable” fees and makes it easier for investors to sue their brokers or advisers if they receive shoddy advice.
The financial industry has fiercely opposed such a rule for years. The Securities Industry and Financial Markets Association, a lobbying group for the industry, called the previously proposed version of the rule “unworkable,” and argued that it would force less-affluent savers out of the market for advice entirely. On its website, the group says that it is currently reviewing the final rule to determine if it is still unworkable.Advertisement
What is likely to change for you, the investor? If you already work with an adviser who charges a reasonable fee, doesn’t accept commissions and recommends low-cost funds, you might not see any changes other than some extra disclosures. If you work with a broker or adviser who charges commissions, you might see changes in the mix of investments your adviser or broker recommends in the future. That might include a shift away from certain fund companies toward others.
Mercer Bullard, founder of Fund Democracy, an investor advocacy group, says that some brokers may start to recommend greater bond allocations and lower stock allocations to better reflect investors’ tolerance for risk. Because stock funds generally pay larger commissions than bond funds, he says, some brokers may in the past have recommended higher stock allocations for their clients than warranted. Firms and advisers have until January 1, 2018, to fully comply with the rule.
Although the DOL’s rule applies only to retirement accounts, it may have broader repercussions as brokerages and other advisory firms adjust their pay models. That could mean more advisers and brokers move to fee-based compensation from commission-based compensation, even for non-retirement accounts. The SEC is working on its own fiduciary rule, which would require all investment advisers and brokers to provide advice in their clients’ best interests for all types of accounts. The SEC is expected to issue a proposed rule on the matter before the end of the year.
Finding someone you feel you can trust with your money is difficult enough even when you’re not worried about understanding new legal standards. But these new rules don’t change anything you need to do when choosing an adviser: We prefer advisers who charge by the hour or according to the amount of money they manage for you and, thus, have fewer conflicts of interest (you can find fee-only advisers through the National Association of Personal Financial Advisors). Do a background check with regulators (including with the SEC, for registered investment advisers, or with the Financial Industry Regulatory Authority, for brokers). And have an up-front conversation about fees and conflicts of interest so that you are crystal clear about how your adviser makes money.

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New Obama rule goes after shady financial advisers

Apr 6, 2016 | CNN Money

By Heather Long

Work hard. Save a lot. Retire in peace. That's the goal.
People get derailed on their way to a happy retirement for many reasons, but the Obama administration says costly -- or outright bad -- financial advice shouldn't be what holds you back.
A new rule unveiled today by the Obama administration requires retirement advisers to always act in the best interest of their client.
"It's pretty obvious if people are expecting financial advice they should be able to count on the fact that it's going to be real advice to help improve your situation," says Bill Harris, the CEO of Personal Capital and former CEO of PayPal.
Many advisers genuinely want to help their clients. But currently, it is legal for an adviser to get paid more money (similar to a kickback) if he or she gets you to invest in fund A instead of fund B.
For example, an adviser might make $200 if he or she has you invest $10,000 in a stock fund but only $130 if he or she has you invest in a bond fund, according to University of Mississippi law professor Mercer Bullard. Advisers recommend the fund that pays them more about half the time, one study found.
"Brokers are salespeople. They sell whatever they and their firm make the most money on," argues Harris. His firm already abides by the rule. It charges clients a flat fee for advice so there's no conflict of interest.
Wall Street is anxious about the rule
All these fees add up. Higher costs and lower returns cost American families $17 billion a year, according to President Obama's Council of Economic Advisers.
The new Obama administration rule -- known as the Fiduciary Standard -- is a big shakeup of the industry. Bullard expects a lot more firms to do away with the kickback-style payments to advisers and just go to a flat-fee model.
Wall Street is anxious about the change. Many financial firms' stocks plummeted in recent weeks as it became clear the White House was moving forward with the rule.
The stock of LPL Financial (LPLA), the nation's largest independent broker-dealer, has tanked over 40% this year. Charles Schwab (SCHW) and E*Trade (ETFC) are both down about 20%. Firms have until January 2018 to comply fully.
There are concerns that financial firms won't make as much money once the rule is fully in effect, but a recent Morgan Stanley report says the impact is likely to be "substantially less" than what the beaten-down stocks imply.
Will the rule make advice more expensive?
A key concern is that the Fiduciary Rule could make advice more costly because of more legal paperwork and compliance expenses.
"If you need more assistance than [basic options], you're gonna get mad when you can't get the support you want," argues Jill Hoffman of the Financial Services Roundtable, an advocacy group for the industry.
Some Republicans have gone as far as to call the rule "harmful" in its current form.
"This rule would raise costs and limit options for people seeking advice on their retirement planning. This rule could hurt millions of middle-class savers," said Republican House Speaker Paul Ryan in March.
Advocates of the new rule push back. They point out that the explosion of lower-cost index funds and new online and app investing advice tools should keep costs down and ensure that middle class families get what they need.
"This rule is a huge win for the middle class," said Labor Secretary Tom Perez. "These rules will save affected middle-class families tens of thousands of dollars for their retirement."
Related: I went from Wall Street...to working at Waffle House
Put the client first
The rule has been debated since 2010. The White House says over 3,000 comment letters have come in from advisers, investors and financial management firms.
The White House claims it has listened and made the final rule less onerous, but it won't back down from helping the middle class.
"It's a very simple principle: You want to give financial advice, you've got to put your client's interest first," said President Obama.

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Conflicted By a Conflict of Interest

Apr 6, 2016 | The Huffington Post

By Lenny Sanicola

The Department of Labor today released long-awaited regulations that make big changes to the way retirement advice is delivered. The final “new fiduciary rule” was announced after numerous years of discussions, lobbying, comment periods, and further considerations. The impetus for the new regulations was that the prior rule allowed for conflicts of interest and biased guidance. With the objective of toughening the oversight of financial professionals who are paid to give retirement advice, the new Conflict of Interest rule requires brokers and certain other individuals serving as fiduciaries to be held to a higher standard.
Due to the higher standard of care mandated, a stricter fiduciary standard is imposed. Prior to the final ruling, brokers are held only to a suitability standard, a weaker burden that the administration, consumer advocates and other critics say permits brokers to sell customers high-fee products that erode their returns. In a nutshell, the rule makes providers of advice and products to many 401(k) plans and all IRAs fiduciaries. It will also require substantial new disclosure requirements, and it is expected to move many commission-based brokerage accounts to a fee-based model.
Under the stricter standard, brokers must place their clients’ interests ahead of personal gain when they make recommendations for retirement accounts; they must offer financial advice in their clients’ best interest, as opposed to what it was before, which was the requirement that they only offer “suitable” advice.
The rule potentially has an impact on employer-sponsored plans. How might this affect employers/plan sponsors? Simply put, most advisers representing the plan will have to act as a fiduciary. The biggest potential impact will be regarding the continued ability of an adviser or record keeper to provide education without acting as a fiduciary, as well as how they are compensated.
In addition, what kind of assistance will advisers be able to give to terminated employees? Though experienced plan advisers might be more prepared to act as a fiduciary on IRA rollovers, the problem is that, under the new regulation, plan advisers will not be able to charge participants more on their IRA rollover than they charge the plan. Advisers restricted on providing education or helping terminated employees could affect outcomes and the financial wellness of departing employees.
Some questions to consider are:
Do any of your current plan service providers, such as your plan’s broker, registered investment adviser, or record keeper, provide fiduciary services to the plan?
Are they a 3(21) co-fiduciary on the investment selection or a 3(38) fiduciary where they have taken on the responsibility of choosing the investments for the plan?
If your current service providers are not fiduciaries, the question becomes, will the new fiduciary rule cause them to now be a fiduciary?
Will the new rules could prompt brokers to stop serving accounts with smaller balances?
Will the new rule create new costs for providers and employers that will ultimately be passed on to savers, ultimately pricing lower-account balance holders out of the advisory market place?
What kinds of conversations do your call center “advice” individuals provide active, terminated, and retired employees?
It is important to understand whether or not your current providers are acting as fiduciaries because of the higher standard of care this causes them to be held to, as well as the limiting of liability for the plan sponsor and/or their retirement plan committee.
Full compliance with the new rule is required by January 1, 2018, which was a change from the original proposal deadline. Other provisions in the proposal have been eliminated, and the “Best Interest Contract Exemption,” which will be required for advisers to sell commission-based products, has been significantly streamlined.

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New Investor Protection Rules Expose An Industry War For Americans’ Retirement Assets

Apr 6, 2016 | International Business Times

By Owen Davis

The biggest regulatory battle to face the financial industry since the Dodd-Frank Act passed a milestone Wednesday as the Department of Labor released a final rule addressing the conflicts of interest endemic to the retirement advice industry.
The new guidelines, which require financial advisers to disclose conflicts, and compel them to act in the best interests of their clients, didn’t come without a fight. Lobbyists for Wall Street broker-dealers and insurance companies spent millions of dollars in an attempt to convince the Labor Department — and Congress — to alter or delay the rules.
But the reforms have been greeted with open arms by registered investment advisers, fee-only planners and other players in the retirement industry who are currently held to a fiduciary standard — a requirement that advisers put clients’ interests first.
These businesses are optimistic that the new rules will push more clients from traditional brokers to other models, from fee-only planners who charge a flat rate on assets overseen to robo-advisers that use algorithms to cheaply invest clients’ savings.
“There’s going to be a spotlight put on fees that’s going to drive demand for low-fee products,” John Blood, chief executive of Efficient Advisors, said. Blood, whose company operates under a fiduciary standard with clients, hopes the new regulatory regime pushes investors from establishment broker-dealers to a new crop of tech-savvy fiduciaries like himself.
It could be also be good news for robo-advisers like Betterment and Wealthfront, which have cornered an increasing share of the asset management market as investors reject the kinds of fees charged by traditional brokerages. This class of adviser has seen assets grow from virtually zero in 2012 to a projected $300 billion by the end of the year.
The Labor Department rule aims to protect the retirement savers who roll some $300 billion in assets from 401(k)s into individual retirement accounts, or IRAs, every year. The Obama administration has held that advisers overseeing these rollovers earn billions of dollars in extraneous fees and commissions every year, eroding the returns of retirement savers.
Most individual retirement account assets reside in mutual funds and variable annuities, which often have high fees.
The new rule largely preserves previous incarnations of the guidelines, requiring steep disclosures of conflicts of interest and making advisers sign a legally enforceable contract with clients promising to work in their best interests. Investor advocates like Americans for Financial Reform and the Consumer Federation of America, which lobbied extensively for the reforms, celebrated Wednesday’s announcement.
The release did contain some concessions on matters that industry groups had argued were unworkable. Advisers will still be able to sell proprietary products and variable annuities, and they will have more leeway in approaching and advertising to clients without signing a fiduciary pledge. Paperwork requirements were diminished.
But despite the compromises, industry analysts expect that the new guidelines, which take full effect January 2018, will deeply affect companies like Wells Fargo and LPL Financial — firms that have faced the dual threats of regulatory pressures and competition from low-cost digital advisers.
“The full-service investment advisory industry is undergoing a historic shift, driven by an actively engaged investor population,” a forthcoming J.D. Power study asserts. “Fewer and fewer investors are putting blind faith in their advisers’ investment recommendations.”
In essence, the increased scrutiny of investors and regulators has threatened the basic business model of broker-dealers who sell mutual funds and other products. A study by Morningstar found that the Labor Department’s restrictions on fees and commissions alone could cost the industry a combined $19 billion.
On Tuesday, International Business Times reported on the changes looming for Edward Jones, whose business model still rests largely on commissions on the sale of products like variable annuities and mutual funds, whose third-party providers pay handsomely for Edward Jones to promote the products.
Edward Jones has argued, along with many in the industry, that the new rule could constrain their ability to serve less affluent clients, particularly those with less than $50,000 in the bank. They point to studies of similar measures introduced in the U.K., where new regulations caused “advice gaps,” according to consulting firm Oliver Wyman, purportedly affecting advisers’ “ability to profitably serve smaller investors.”
“The brokerage community needs to make certain fixed-dollar amounts to be profitable for a smaller account,” Mitch Tuchman, managing director of Rebalance IRA, said. “The smaller the account, the more then need to find commissions and loads to break even.”
As one former annuity salesman wrote to the Labor Department, “I worked with many types of clients, most of whom were middle-class individuals, and 100 percent of my compensation was in the form of commissions.”
The new rules do not bar commissions but require brokers to provide additional disclosures and promise that their advice is truly in the best interest of clients. The fiduciaries with whom IBT spoke expected the new mandates to raise investors’ awareness of the fees and conflicts that the president’s Council of Economic Advisers has said drive $17 billion a year from the accounts of retirement savers to Wall Street. Industry groups dispute those numbers.
Currently, most investors have little idea whether their adviser is a fiduciary or even what fees they charge. As many as 60 percent of investors don’t completely understand the extent of their fees, according to the J.D. Power study.
“Although many investors don’t understand the meaning of ‘fiduciary duty,’” a 2012 Securities and Exchange Commission report found, “investors generally treat their relationships with both broker-dealers and investment advisers as relationships of trust and expect that the recommendations they receive will be in their best interests.”
Until now, that has been a mistaken assumption. “Consumers and clients really don’t understand this,” Blood said. “They hate the fact that a fiduciary standard is even necessary. They feel like it should be the expectation that a financial adviser is acting in their best interest at all times.”
While advisers who oversee pensions and 401(k)s must abide by a fiduciary standard, brokers who deal with IRAs aren't required to act solely on their clients' behalf. As retirement assets have slowly shifted to IRAs in the past several decades, this inconsistency has grown more apparent.
Though industry groups support a type of best-interest standard, they have greeted the Labor Department’s new rule cautiously. “We continue to believe the department's methodology is greatly flawed and lacking sufficient empirical basis,” the Securities Industry and Financial Markets Association, an industry lobbying group, said Wednesday. Like other groups, Sifma said it was still reserving final judgment as it examined the new rule at length.
The Chamber of Commerce has threatened to sue the government over the rule, and Jaret Seiberg, a policy analyst with Guggenheim Securities, doubted that stance would change. “Litigation stills seems inevitable,” he said in a note to clients Wednesday.
Barbara Roper, director of investor protection at the Consumer Federation of America, who has applauded the new regulations, doubted the industry would back down. “They will soon have a list of reasons why they can’t possibly comply with those rules,” she said. “Their desire was to maintain the loopholes that allow them to act as advisers without being regulated as advisers.” Those loopholes have been narrowed by the rules.
Tuchman, whose firm Rebalance IRA uses a mix of index fund strategies and in-person advising to provide low-fee investment services, welcomed the fight. To him, the changing regulatory landscape represents healthy industry disruption at work. “It’s what happens in capitalism.”

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New Financial Trade

Brokerage Industry Still Cool On Final DOL Rule

Apr 6, 2016 | Financial Advisor

By Dan Jamieson

While supporters of the DOL’s fiduciary rule sang its praises Wednesday as the department unveiled the final version of its controversial plan, some in the brokerage industry had a decidedly frosty response.
“As we have said since day one, there is no compelling evidence this rule is necessary to achieve a uniform fiduciary standard, and DOL’s own analysis fails to make the case,” said Financial Services Institute (FSI) CEO Dale Brown in a statement.
“We will spend the coming days thoroughly analyzing this rule to determine if it protects Main Street investors by preserving their access to affordable, objective financial advice,” Brown said.
FSI spokesman Chris Paulitz said it would take the organization another week or so to analyze and respond to the final rule.
Likewise, the Securities Industry and Financial Markets Association said it would need time to review the rule and determine its impact.
“As with the prior proposal, this final rule is voluminous and every word matters,” said Kenneth Bentsen, SIFMA’s CEO, in a statement.
“We remain concerned that the DOL's rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement,” Bentsen said.
Separately, the Equity Dealers of America called for congressional action to stop the DOL’s effort.
“We believe it’s time for Congress to use the Congressional Review Act to subject DOL’s fiduciary rule to congressional scrutiny,” said Chris Iacovella, executive director of the Equity Dealers of America, in a statement.
The Congressional Review Act is a 1996 law that allows Congress to pass resolutions to overturn new federal regulations.
Such a resolution would need a two-thirds majority to overcome a certain veto by president Obama, who has strongly supported the DOL rule.
Iacovella was not immediately available Wednesday.
Not all B-Ds were negative on the DOL’s final rule, however.
The department eliminated a proposed prohibited-product list for IRAs (including non-traded REITs and options), and streamlined disclosure requirements and the best-interests contract that allows commissioned products in retirement accounts. The DOL also extended the implementation period to 12 months from eight months.
“It does appear that all investments can be [used], as long as provisions of the [best-interests contract] are met, and it looks like they have made meaningful changes to fee and compensation disclosures,” said Doug Baxley, assistant vice president of compliance at Securities Service Network.
In a statement, LPL Financial said it was “pleased by what appears to be positive changes implemented in the rule,” noting the increased time for implementation, easier terms on using the contract with existing clients, and freedom to recommend any product.
Cindy Schaus, spokeswoman for Cambridge Investment Research, said the company was appreciative of the apparent compromise on the implementation schedule.
The modifications “indicate the DOL has considered some of the industry’s concerns,” agreed Adam Antoniades, president of Cetera Financial Group, in a statement.
“However, we will be studying the newly released details of the final rule” to determine the firm’s response, he said.

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DOL Leaves The Door Open For Rollovers

Apr 6, 2016 | Financial Advisor

By Christopher Robbins

In the fallout over the final version of the Department of Labor’s sweeping fiduciary rule, advisors are praising a change that many say will enable them to provide more holistic advice on a client’s retirement accounts.
Under the rule’s final language, fiduciary advisors will receive an exemption for advice they provide to clients deciding whether to roll over an employee-sponsored retirement plan like a 401(k).
“This is good news for advisors with a qualified plan business who also advise on rollovers,” says Justin Morgan, director of internal sales and service at Lexington, Ky.-based hybrid Unified Trust. “I note that the final rule still includes this idea of a recommendation leading to a rollover being considered as fiduciary investment advice, and that it’s being held to a fiduciary standard of conduct.”
The exemption will only apply so long as certain conditions are met, including an acknowledgement that the recommendation is in the client’s best interest.
At Simply Money, a Cincinnati-based RIA, CEO Nathan Bachrach says the rollover provisions are a win for retirement investors and help level the retirement planning playing field.
“It will be effective at getting advisors who are involved substantially in IRA rollovers to either clearly articulate why a customer should pay a fee that might be in excess of the internal expenses that they had in their 401(k)s, and what they should expect in return,” Bachrach says. “That’s always been the case for RIAs; they have to explain their fee and justify it. What we really had in some of these rollovers were a lot of fees that were never accounted for or never had to be justified.”
The rule’s original language said that, unless compensation did not increase at all when a rollover occurred, advisors would only have been able to help clients if they first complied with the “best interest contract exemption” clause in the DOL rule, and only if they had no investment discretion within client accounts.
“The idea that assets were better served inside a 401(k) plan after an employee leaves a company is a questionable proposition, at best,” says Charles Goldman, CEO and president of Concord, Calif.-based AssetMark
At the Beacon Group of Companies, a hybrid wealth management firm based in King of Prussia, Pa., Brian Menickella says rollover advice was already changed to be in compliance with the original language.
“If a recommendation is made to roll over an account, the costs associated with the fees would be the same as if they had remained in the 401(k),” Menickella says. “I think that there should be some flexibility in the rule.”
Industry agencies, like the National Association of Plan Advisors, argued that the original language would place retirement plan advisors at a disadvantage to advisors that had no previous relationship with plan participants, and that advisors would have been effectively penalized for advising a client to roll over.
In their new form, the rules still appear to prohibit the practice of rolling 401(k) and other defined contribution plan funds into high-cost annuities or IRAs with large allocations to products with outsized commissions and fees.
Along with the revised rollover provision, the final version of the DOL’s rule also eliminates a list of investments that would qualify for the best interest contract exemption, which opens the door for non-traded REITs and business development companies to be included in IRAs.
“Any investment is appropriate for RIAs to recommend as long as it is in the best interest for the client,” says Matt Sommer, vice president and director of retirement strategies at Denver-based Janus Capital. “Rather than just prescribing a list, it opens up IRAs to different sorts of investments and investment vehicles and allows the end client to make a determination.”
Steve Dudash, president of Chicago-based IHT Wealth Management, says that the rollover rules—both in their current and original forms—provide important consumer protections.
“The unfortunate fact is that there are advisors out there who have made their entire living rolling over people’s 401(k) assets and plunking it all down into annuities,” says Dudash. “Many of these advisors don’t even know how to open accounts that aren’t related to annuities. This new rule will absolutely change the landscape in a positive way in the coming months as practices such as these will become obsolete.”

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How the DOL Fiduciary Rule Will (and Won’t) Affect RIAs

Apr 6, 2016 | ThinkAdvisor

By James J. Green

In March, a prominent RIA chuckled when asked how he was preparing his wealth management firm for the Department of Labor’s redefinition of fiduciary under ERISA. “I’m sick of hearing about this rule,” he said, suggesting that the rule would not affect his firm at all.
That feeling is understandable, since RIAs already have a fiduciary duty to put their clients’ interests ahead of their own, while the burden of complying with the rule — released today — will mostly be borne by advisors and their broker-dealer partners.
However, he may be wrong. For example, while advisors are used to dealing with the Securities and Exchange Commission as their regulator and examiner, the DOL has a different enforcement scheme, though advisors who consult on retirement plans may already be familiar with the DOL and the complicated rules of the Employee Retirement Income Security Act. RIAs are used to disclosing conflicts of interest through their Form ADV filed with the SEC or the states, but “that will not suffice for the DOL rule, which is focused not on disclosing conflicts but on prohibiting them,” Schwab’s Michael Townsend said late last year.
Townsend, Schwab’s vice president of legislative and regulatory affairs, said then that “layering on another set of regulators will require someone in the firm to understand them to potentially monitor and comply with.” RIAs will have to consider, for example, “what kind of information … to provide to someone who is contemplating moving from a 401(k) to an IRA … someone who may not yet be a client of yours but may be considering become a client.” Can the advisor recommend a 401(k) rollover into an IRA when the advisor’s management fee for the IRA exceeds the 401(k) plan’s fee or when the IRA doesn’t perform as well as the 401(k)?
In a Fidelity advisor survey released last month, 55% of RIAs surveyed said they expect the rule will increase the time they must spend on compliance. Tom Corra, COO of Fidelity Clearing & Custody, said in an interview then that “at a minimum,” advisors should expect to have “a conversation with clients” and increased recordkeeping costs.
A preliminary assessment of the DOL rule suggests some of those compliance worries may not be as big an issue as first thought. Skip Schweiss, managing director for retirement plan services and advisor advocacy, listed several changes in the final rule of interest to RIAs.
He provides the caveat that “I have not yet read all of the 1,023 pages in the final regulations,” though he has “read the FAQs and the summary released last night” by the Department of Labor.
His first response is that DOL “retained the spirit of the rule — to raise the standards of care for retirement investors — but they also listened to a lot of the concerns that retirement advisors” and the industry had about the preliminary rule, which has been six years in the making. “They struck a really nice balance,” he said.
Those sentiments were echoed by several advisors. Harold Evensky of the wealth management firm Evensky Katz Foldes and Texas Tech University said in an email that the DOL rule constituted a "major step toward a more secure and dignified retirement for millions." David Savir, a former JPMorgan wealth manager turned RIA just this year at Element Pointe Advisors in Miami, said in a note that "the fiduciary rule is a very positive change for investors."
Also, Schweiss pointed out that the implementation date for the new rule has been pushed back from this October to April 2017.
Schweiss also points out a benefit to investors. Since the DOL best interest standard is a “contractual obligation,” the rule “essentially takes mandatory arbitration out of these retirement accounts; investors’ rights are still retained.”Finally, Schweiss says his early reading suggests the DOL has constructed a fiduciary process that’s “more principles-based” than rules-based.
As for the benefits to advisors, particularly regarding the Best Interest Contract Exemption (BICE), he noted that “annual disclosures are gone, as are the 1-, 5- and 10-year projections” of the performance and costs of investment vehicles that the preliminary rule would have imposed. “They had to go,” he argues, since they were in conflict with Financial Industry Regulatory Authority rules.
In addition, he says that “some” of the BICE requirements “for RIAs were removed,” notably changing the timing of when a BIC must be presented to a client “from the point of initial conversation … back to it being part of the account-opening paperwork” process.
So will RIAs be affected? Schweiss said dually registered RIAs “will be impacted more than the fee-only RIAs.” Are RIAs ready for the rule? “My sense is they’re not — there was an [erroneous] idea that it only applied to brokers and insurance agents.”
With such a complicated rule, this is one instance where being a broker-dealer rep might make it easier to comply. “Broker-dealer reps have a home office preparing” for the DOL rule, he points out, mentioning steps already taken by LPL and Raymond James. Those broker-dealers probably feel some relief since it appears, Schweiss said, that “if you’re living under the Best Interest Contract, you can still recommend options, futures, forex and nontraded REITs.”
As for RIAs, Schweiss says that “If I were them, I’d be in touch with my securities lawyer or ERISA lawyer.”

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How the DOL Fiduciary Rule Will Affect Rollover IRAs, Annuities and Other Products

Apr 6, 2016 | ThinkAdvisor

By Bernice Napach

The final fiduciary rule announced by the Department of Labor on Wednesday does not go as far as many critics of the proposed rule had feared, but it will have an impact on financial advisors and the products they offer to clients. It’s also expected to accelerate the move from a commission-based business to fee-only model, which has been an ongoing and growing development in the evolution of the industry.
Advisors, however, will still be able to offer commission products, including annuities and proprietary services, but not necessarily in the way they have until now. Moreover, the changes won’t take effect in their entirely until Jan. 1, 2018, months later than had been expected.
“Advisors need to think about the product set they currently offer clients,” says Matt Sommer, director of defined contribution and Wealth Advisor Services at Janus Capital. They need to consider the fees for those products, but there is flexibility. For example, says Sommer, the rule says that “fees are not the only criteria to use when making investments … and that moving from a commission-based client to fee-based one is prohibited if it’s not in the client’s best interest….It’s all about the client.”
“Whatever the investment vehicle involved (such as stocks, annuities, mutual funds, SMAs or commission products), the advisor must be acting as a fiduciary,” says Jim Pasztor, of the advisory firm Pasztor & Associates and vice president of academic affairs at the College for Financial Planning.
The rule is “focused much more on disclosure than outright elimination of differential compensation,” says Natalie Wolfsen, chief commercialization officer of Asset Mark, a trunkey asset management program provider for 7,000 advisors.
Here’s how the rule is expected to affect some of products that advisors offer for retirement accounts, which are the only client accounts that are covered by the DOL’s fiduciary standard.
Rollover IRAs
While the rule does require that advisors working with clients on rolling over their 401(k) accounts into an IRA act in the best interest of those clients it does not regard the information or education they provide about retirement products as investment advice, as had been feared. “Advisers and plan sponsors can continue to provide general education on retirement saving without triggering fiduciary duties,” according to the DOL Fact Sheet.
Advisors will also be able to continue to sell commissioned products if a Best Interest Contract Exemption (BICE) is signed by the client and the advisor’s firm. The form, which can be signed at the point of sale not earlier, commits the advisor to put their client’s best interest first so long as they
disclose conflicts of interestcharge “only reasonable compensation”avoid misleading statements about fees and conflicts of interestprohibit financial incentives for advisors that act contrary to a client’s best interest
What is “reasonable compensation,” however is open to interpretation.
Advisors will need to be much more aware of the fee structure of the rollover IRA compared to that of the 401(k) plan, says Terry Dunne, managing director of rollover solutions group for the Millennium Trust Co. Fees in 401(k) plans will most likely be lower than the fees in the rollover IRA.
Fee-only advisors, whether they charge a fee based on a percentage of AUM or a flat fee, will not be required to file a BICE for recommending that a client roll over assets from an employer plan to an IRA. That’s because they receive the same compensation no matter what investments are included in the rollover IRA, according to the DOL.
However, “even RIAs who are fee-only will need to shore up their processes on their discussions with clients about rollovers,” says Sommer, noting that they will need to document why assets were moved from a lower priced institutional 401(k) plan to a higher priced retail rollover IRA. That case can be made, but the documentation has to include the reasons why, such as advice also given on Social Security or beneficiaries, says Sommer.Commission Products & Proprietary Products, Including Annuities
In the “protect your savings” FAQ section about the new fiduciary rule on its website, the DOL states clearly that the BICE can “flexibly accommodate a wide range of compensation practices, including commission-based accounts, while minimizing the harmful impact of conflicts of interest on the quality of advice.”
The DOL rule also doesn’t ban proprietary products but notes that firms offering only a limited number of such products for retirement accounts will have to “disclose the associated conflicts of interest … [and] adopt measures to protect investors from those conflicts.”
Moreover, advisors who recommend a limited set of products “must consider what is in the retirement investor's best interest.” If it’s a product they don’t offer, say a stock index fund, those advisors “cannot recommend a product from their limited menu.”
Advisors will still be able to sell commission-based variable and index annuities, but they will have to justify that with a BICE. Eventually the market for those products could change. Larry Greenberg, president of Jefferson National, which offers advisors a platform for tax-deferred income-only variable annuities in nonqualified (non-retirement) accounts expects the rule will put pressure on insurers who sell front-loaded insurance products like variable annuities “to reassess their product lines and compensation” in order to meet the standards of the BICE.
Mutual Funds
It’s expected that the more expensive classes of mutual funds will come under pressure. “You’ll see adjustments in those products and in advisors’ use of those products,” says Wolfsen of AssetMark.
She expects that fund companies will lower the expense ratios of shares sold to retail investors to match those charged by the institutional version of the same fund and that advisors will move away from funds charging 12b-1 fees, which compensate them.
“Advisors will need to make sure that the class being recommended is the best available for the client, and that it has reasonable fees,” says Pasztor. “Look for 12b-1 marketing fees and trailers to be reduced and/or disappear over time.”
The Investment Company Institute, the trade group for the mutual fund industry, released a statement noting that because “the rule is lengthy and complex” it needs “to carefully review and analyze its details to understand fully how it will affect mutual funds.” It will hold a meeting of industry leaders on May 10 in Washington to discuss the implications of the new rule.

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Perez: DOL Fiduciary Rule Can Survive Lawsuits

Apr 6, 2016 | ThinkAdvisor

By Melanie Waddell

The Department of Labor is confident that its just-released rule to amend the definition of fiduciary under the Employee Retirement Income Security Act will survive legal challenges, the two top architects of the rulemaking said Wednesday.
“Every rule we take, people threaten us with litigation,” Labor Secretary Thomas Perez told reporters on the sidelines of the event to announce release of the final rule at the Center for American Progress in Washington. “We had a very lengthy and deliberate process, and what people see when they review the rule is that we listened and made changes. I’m confident in what we’ve done on the policy front, and I’m confident that we will survive any legal challenge.”
Perez also said that he believed the number of opponents to the rule would actually shrink over the course of the compliance timeline, which was extended from eight months to one year.
“The volume of opponents I think is going to shrink because they are on the wrong side of the debate and are on the wrong side of history, on the wrong side of the American people, and are on the wrong side of Main Street,” Perez said.
Phyllis Borzi, assistant secretary of Labor for DOL’s Employee Benefits Security Administration, agreed in comments to reporters that DOL is “confident that we have put together a rule that will survive legal challenges.” However, she said, “people have a right to” challenge the rule in the courts. “That’s the American way.”
Borzi, who has been the main architect of the rule but turned over public statements about the rulemaking to Perez over the past couple years, said she knew getting the rule finalized “was going to be a difficult haul.” But, she said, “it was the right thing to do.”
Added Borzi: “Whatever the slings and arrows we took along the way, this is worth it. But we’re not finished.”
After six years of working to get the rule completed, Borzi said that DOL will now turn to helping firms comply with the rule. “The process is just beginning because there will be lots and lots of questions that will come,” she said. “My staff is prepared to help people to comply; compliance is going to be the mode that we’re going to be in from now on.”
DOL extended the compliance deadline from eight months to one year “to balance the need to get the protections in place as soon as possible with the practicalities of how long it would take people to implement this” rule, Borzi said.
The new rule also includes a phased-in implementation so firms will have until Jan. 1, 2018 to come into full compliance.
She added that under the new rule, “people will have to create new policies and procedures, new compensation arrangements perhaps, develop new products.”
Indeed, Rep. John Delaney, D-Md., stated in comments at the event that with DOL’s final rule, “the private economy will embrace the standard because they have to, and many of them have been doing that already, and they will innovate around providing solutions that meet the standard and make customers happy and are low cost.”
Delaney said he sees two events unfolding: “The existing players … will adopt this rule, make changes to their business models as needed, and they’ll work hard to keep every one of their customers because one of biggest costs that financial services companies have are what’s called customer acquisition — meaning the money they spend for customers,” he said. “So why in the world would any of the companies stop serving any of these customers that they’ve invested a huge amount of money in? I just don’t buy into this idea that they’ll stop serving these customers.”
Second, Delaney said, “we’re also going to see new innovation.” Right now, “there are people in conference rooms with white boards, entrepreneurs and investors charting out new businesses to build to provide this level of service.”
At press time, supporters and opponents of DOL’s rule were busy wading through the voluminous final rule, which is available on the Federal Register’s website.
Rep. Ann Wagner, R-Mo., who sponsored the Retail Investor Protection Act, bipartisan legislation passed in the House that would require the Securities and Exchange Commission, not DOL, to take the lead on crafting a fiduciary rule, said Wednesday that she was “working closely with House leadership and members of the Education and Workforce Committee on using the Congressional Review Act to stop [DOL’s] ill-advised rule.”Like other detractors, Wagner said she worries that DOL’s rule “will only hurt those it claims to protect, jeopardizing the ability for millions of low- and middle-income Americans to receive sound investment advice.”
Sen. Ron Johnson, R-Wis., chairman of the Senate Homeland Security and Governmental Affairs Committee, said in a statement that he was “disappointed” that DOL issued its fiduciary rule, “despite widespread concern about the rule’s complexity and the harm it may do to low- and middle-income investors.”
Johnson released in February a report titled “The Labor Department’s Fiduciary Rule: How a Flawed Process Could Hurt Retirement Savers,” which stated that the DOL “disregarded concerns and recommendations” from SEC staff regarding its fiduciary rulemaking.
Two main industry trade groups opposed to DOL's rule — the Financial Services Institute and the Securities Industry and Financial Markets Association — said Wednesday that they would spend the coming days analyzing the rule.
DOL’s “two earlier proposals were complex and unworkable,” said FSI President and CEO Dale Brown. “As we have said since day one, there is no compelling evidence this rule is necessary to achieve a uniform fiduciary standard, and DOL’s own analysis fails to make the case.” Brown said FSI would analyze the rule “to determine if it protects Main Street investors by preserving their access to affordable, objective financial advice delivered by their chosen financial advisor.”
Ken Bentsen, SIFMA’s president and CEO, stated that as with DOL’s prior proposal, “this final rule is voluminous and every word matters,” adding that it will take time to review the rule to determine “its impact on investors and their ability to save for retirement.”
While SIFMA “has long supported a best interest standard for all advisors, … we remain concerned that the DOL’s rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done.”

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Initial Reaction to Fiduciary Rule Mostly Positive

Apr 6, 2016 | PlanSponsor

By Rebecca Moore

The Department of Labor (DOL) has finally issued its final fiduciary rule (or what it calls the conflict-of-interest rule), and comments from consumer and financial industry groups have been pouring in.
While most are still digging into the details of the final rule, the initial response has been mostly positive. The final rule includes changes the DOL said were in response to industry concerns.
U.S. Senator Ben Cardin (D-Maryland), a member of the Senate Finance Committee, said he is reviewing the final rule to make sure it is workable. “A best interest standard is key to ensuring Americans receive financial advice they can trust and to combatting truly abusive behaviors in our financial system. As I have said throughout this rulemaking process, it is critical that a final fiduciary rule be workable and useable, and enhance savings opportunities and retirement security for small businesses and moderate income families. I look forward to reviewing the announced changes with these concerns in mind,” he said in a statement.
Consumer groups were especially pleased with the final rule. Nancy Zirkin, executive vice president and director of policy at The Leadership Conference on Civil and Human Rights, said, “This common sense rule will ensure that when working Americans turn to financial professionals for help, they will get honest advice that’s in their best interest—not a self-serving sales pitch. We applaud the Administration and Secretary Perez for taking this much-needed step in improving an outdated system that has cost working and middle-class families billions of dollars in retirement savings due to biased, unethical financial advice. This long overdue rule will protect Americans from the conflicts of interest that allowed advisers to reap excessive profits and kickbacks while costing retirement savers more than $17 billion a year. Today’s announcement will help all Americans—whether they can save a little or a lot—retire with dignity.”
The Consumer Federation of America (CFA) Financial Services Counsel Micah Hauptman, stated, “While we will conduct a more detailed analysis of the rule over the coming days and weeks, our initial review indicates that the rule is a huge win for consumers. It appears that the rule properly closes the loopholes in the current rule so that financial professionals can no longer evade their obligation to serve their customers’ best interest... At the same time, the DOL has offered a balanced approach that reflects considerable input from a variety of stakeholders.”
AARP Executive Vice President Nancy LeaMond, said, “Today marks a tremendous victory for consumers. The new rules ensure that anyone who is saving for their retirement will know that the advice they receive must be in their best interest. This is simply common sense, and it is common practice for many financial professionals already.”
NEXT: Many appreciate the changes DOL made
Erin Sweeney, of Counsel at Miller & Chevalier, noted some of the significant changes between the final rule and the proposed rule. “The DOL eliminated some of the most contentious disclosure requirements from the proposal, including eliminating the requirement to develop investment projections and distribute an annual disclosure to investors,” she noted.
Sweeney also notes that the final rule exempts plans covered by the Employee Retirement Income Security Act (ERISA) from the requirement that a fiduciary investment adviser or financial institution enter into a written contract with an investor prior to making a “recommendation.” Although IRAs and non-ERISA plans remain subject to the written contract requirement, the final regulation clarifies that the contract provisions can be incorporated into account opening documents. Moreover, the regulation makes clear that existing clients need not execute a new written contract—instead, advice providers can notify current clients of the amendments and if the client does not object to the modifications, the new provisions will become part of the existing agreement between the advice provider and the investor. Along the same lines, the DOL incorporated a grandfathering rule for existing arrangements.
“Another notable change is that the DOL eliminated the list of approved investments and indicated that advice providers are permitted to provide investment advice with respect to all asset classes to investors. The DOL also expanded the ability of plans with less than 100 participants to obtain investment advice from an advice provider without that provider becoming subject to the fiduciary rules. Finally, the DOL also clarified what is not covered—the final rule spells out the DOL’s view that health, disability and term life insurance policies are not subject to the fiduciary rule. Similarly, the DOL reserved all appraisal and valuation issues for a later rulemaking,” Sweeney stated.
Rob Foregger, co-founder of NextCapital, said, “The DOL has made very sensible amendments to the proposed rule. The final result strikes the right balance.”
LPL Financial seemed to agree, issuing this statement, “Upon initial review of the Department of Labor fiduciary rule, LPL Financial is pleased by what appears to be positive changes implemented in the rule and appreciates the Department of Labor’s willingness to listen to concerns about protecting choice for investors. In particular, we are encouraged by the increased time frame for implementation, the ability to easily enter into the Best Interest Contract with our existing clients, and the freedom to recommend any assets that are appropriate to help investors save for retirement.”
NEXT: Still concerns
Despite mostly positive reactions, there were some groups that still expressed concerns with the final rule.
Kenneth E. Bentsen, Jr., SIFMA president and CEO, said, “As with the prior proposal, this final rule is voluminous and every word matters. It will take time to review the rule to determine its impact on investors and their ability to save for retirement. SIFMA has long supported a best interest standard for all advisers, yet we remain concerned that the DOL's rule could force significant changes to current relationships, which may leave clients without the help they need to prepare for retirement, at a time when we all agree that more can and should be done. While we continue to believe the Department's methodology is greatly flawed and lacking sufficient empirical basis, a poorly drafted rule could result in unnecessarily raising costs for investors while limiting their choice, a concern shared by many commentators and other regulators.”
The Financial Services Roundtable (FSR) said it will be analyzing the final rule to determine any appropriate further action. “Policymakers should do everything they can to help Americans be more prepared for retirement and not create red tape that makes saving for retirement more difficult,” said FSR CEO Tim Pawlenty.
FSR also noted that the DoL’s fiduciary proposal has triggered significant public policy and implementation concerns from the financial services industry, academics, policy experts and elected officials from across the political spectrum.
The Insured Retirement Institute (IRI) stated that it made a point to make the Administration and Department of Labor aware of how its fiduciary rule proposal would limit consumers’ choices for retirement products including lifetime income strategies. IRI President and CEO Cathy Weatherford said, “In addition to concerns about limited consumer choice on lifetime income products, IRI and its member companies, along with hundreds of members of Congress on a bipartisan basis and thousands of other commenters, have been concerned that the rule as proposed would restrict access to retirement planning advice for younger savers and those with modest savings.
“We have provided considerable, constructive input to the Department of Labor, the Administration, and policymakers on Capitol Hill to help address these concerns. Through our comment letters, testimony and meetings with regulators, we have provided specific revisions to ensure retirement savers can continue to access retirement planning advice and a full array of lifetime income options. We will carefully examine the rule in its final form to determine if these important changes have been made to avoid any harmful consequences for retirement savers.”

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Early Fiduciary Rule Interpretation from ERISA Experts

Apr 6, 2016 | PlanAdviser

By John Manganaro

All told, the Department of Labor (DOL) published nearly 1,000 pages of text in its unveiling of the final fiduciary rule Wednesday morning, with implementation dates ranging from April 2017 through the beginning of 2018.
According to Russ Hirschhorn, a partner in the Employee Retirement Income Security Act (ERISA) Practice Center and the Labor & Employment group at law firm Proskauer, it will “take some real time before the industry has fully digested the rulemaking,” which appears to include a series of key changes from the version proposed in 2015.
“The DOL says it has dialed back some of the requirements in the rulemaking that were challenged by the advisory industry, and that certainly appears to be the case according to the facts sheet the department issued this morning,” Hirschhorn tells PLANADVISER. “But I should also say that I think it’s still too soon to know with real confidence how much they have dialed this back.”
It’s not that he doesn’t believe the DOL when it says it has softened the rule, Hirschhorn says, “but I can tell you that probably nobody has made their way through the hundreds and hundreds of pages of complex language that make up the final rule.” He expects ERISA attorneys and other industry practitioners to slowly digest the rulemaking in the next several weeks. “Some will find they are well prepared, but for others, even with the changes, it will be a real operational challenge to come into compliance.”
At this early juncture, one clear win for the advisory industry skeptics who have opposed the rulemaking is the extended deadline for implementation and compliance, Hirschhorn feels. “According to the facts sheet, the first days of the implementation are not until April 2017, with a second phase in January of 2018, so this phased implementation is a positive thing. We were happy to see that at Proskauer, I can tell you, because we know that will obviously be easier for our clients to meet than a rule fully taking effect in 2016 would have been.”
Hirschhorn concludes that there is even less clarity, at this point, about how the final rulemaking will impact retirement plan advisers who are also active in the individual retirement account (IRA) market. While some restrictions on so-called “IRA cross-selling” have been cut from the final rule, he feels “the way the rulemaking will impact IRA sellers is extremely complicated, and it remains to be seen how this will play out.”
NEXT: Others are more confident
After a very high-level overview, Michael Webb, vice president at Cammack Retirement Group, feels the DOL has made some significant changes between the most recent proposed rule and the final rule, “easing some of the adviser community's concerns.”
For example, he says it no longer seems that providing the names of specific retirement plan investments as part of asset-allocation modeling will automatically make someone a fiduciary. “A long-time practice of retirement plan recordkeepers, this will continue to be permitted as participant education,” Webb explains. “Under the proposed rule, such fund naming would have been considered an investment recommendation that would have been subject to the fiduciary rules and thus would have been unworkable for recordkeepers, who are not fiduciaries in most cases. It should be noted that the restriction on naming investments will still apply to IRAs.”
Webb adds that another key change, from the advisory firm perspective, is that the exemption from the final rule for larger retirement plans, or the so-called “sophisticated investor” provision, now defines such plans as those with $50 million or more in assets. “The threshold was $100 million under the proposed rule,” he explains.
“In another victory for the financial services industry, those who receive level fees (rates of compensation that do not change regardless of investments selected) will not be subject to the complicated rules known as the Best Interest Contract Exemption,” Webb concludes, adding that the previous BIC structure “would have effectively prevented individuals from advising participants on IRA rollovers if the adviser received compensation from the IRA product.”

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Digital Wealth Leaders Celebrate Fiduciary Rule

Apr 6, 2016 | Financial Planning

By Suleman Din

While much of the wealth management industry cautiously mulled over the potential impact of the fiduciary rule, digital-first firms were quick to celebrate.
Sitting on the very panel in Washington as the rule was dissected was Christopher Jones, chief investment officer at Financial Engines. The moment in history wasn't lost on him.
"Today was a pretty momentous occasion in financial services," Jones says. "I am excited about the impact this will have on the industry in the longer term, such as curbing some of the consumer-unfriendly practices that have existed for years."
Digital advice providers, financial planning software firms and digital service providers largely voiced their support on social media and on their websites for the Department of Labor's rule.
“This is a great day for investors across America," says Riskalyze CEO Aaron Klein, who was busy tweeting his support for the rule and showing how his firm would be helping clients respond to it. "The suitability standard is gone, replaced by a fiduciary duty to do right by our clients. That’s a great achievement for our industry.”
Rob Foregger, co-founder of Next Capital, says the Labor Department "made very sensible amendments to the proposed rule. The final result strikes the right balance."
"The new DoL fiduciary rule is a major step forward for the modernization of the $17 trillion retirement industry -- and perhaps the largest overhaul to the investment management industry in nearly three decades," he added. "The DoL went to great lengths to integrate the productive feedback from the financial industry, while ensuring that a true fiduciary standard of care was enacted."
'WE'RE OPTIMISTIC'
Among robo advisors there was added incentive for the support -- an industry expectation that they will be able to win smaller retirement accounts deemed not cost efficient to keep or a liability due to the new regulations. The leading independent robo, Betterment, launched its 401(k) platform in January.
"We’re optimistic about the DoL’s rule-making and what it represents," Betterment CEO Jon Stein says. "We built Betterment as an alternative to the conflicted, sales-driven business models that previously dominated the market for retirement advice."
Jones says his firm's support for the rule was based on a model of serving client's best interests.
"Our support for the rule was never really about any business advantage we thought it would provide," he says, predicting further digital advice provider acquisitions as well as divestments of businesses.
"It's not easy to build a brand and an established, profitable business in this space," he adds.
In the wake of the rule, digital advice providers discussed how to allay concerns about their ability to meet fiduciary obligations, most recently raised by one of the nation's leading regulators of financial services, the Massachusetts Securities Division.
Personal Capital CEO Bill Harris says the rule will prompt providers to adopt the hybrid robo model that his firm already offers.
"I predict that it will take upward of three years for any traditional financial institution, or robo advisor, to change their business models enough to be able to truly know their customers and put consumers first," Harris says. "People should be relying on both account aggregation and live conversation -- the blend of technology, coupled with human understanding from trained advisors. Anything else is simply not good enough."
Min Zhang, CEO of Totum Wealth, notes that when an advisor helps the client understand the tradeoffs between best interest contract exemptions and fee-based advice, "it shouldn’t just be about the fees visible to the client, but should comparenet returns on all fees."
Zhang also recommends conducting comprehensive know-your-client research with an approach that better engages the client and does not rely solely on automated questionnaires. "While conforming to the new rule looks daunting, it’s not rocket science," she says.
Financial Engines' Jones says not all digital advice providers are the same, pointing to how his firm's digital advice platform has gone through multiple rounds of evolution since 2006.
"There is absolutely no reason why digital advice cannot be a fiduciary," Jones says.

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Roth: Will the Fiduciary Standard Actually Help Consumers?

Apr 6, 2016 | Nasdaq

By Financial Planning

At first blush, the fiduciary standard is a big win for consumers. Hopefully it will be, though I have my doubts.
It’s still the Wild West when it comes to investment advice. It’s absolutely legal for an advisor to capture the lifetime savings a consumer has built up in their 401(k), have them roll it into an IRA and then sell them an annuity paying handsome commissions -- that leads to a nice trip to the Ritz-Carlton Grand Cayman to boot. That’s more than wrong and I’ve seen it too many times.
But will the fiduciary rule fix these abuses?
Consider a case several years ago of a CFP with fiduciary duty who sold an annuity to a client. The CFP apparently couldn’t make up his mind whether to charge commission or ongoing management fees, so he did both. I estimated the total fees at 5.29% annually. The facts were so egregious after complaints were logged, that the insurance company and broker-dealer offered a very fair settlement without the involvement of lawyers.
The consumer told me he had trusted the advisor because he knew he had to act in his best interests. When the consumer filed complaints on breach of fiduciary duty, regulators and the CFP Board all found no wrongdoing. This outcome led me to conclude that no matter how lofty the mission statement may be, in practice, the fiduciary standard isn't enforced.
A fiduciary standard isn’t exactly new. The Investment Company Act of 1940 gave this fiduciary duty to both advisors and directors of mutual funds.
I could go on and on regarding all of the abuses by dubious fiduciaries I’ve discovered while reviewing client portfolios of the consumers who placed false reliance on the belief that advisors were legally obligated to put the client’s interests ahead of their own.
I’m of the belief that consumers are actually harmed if they are told by their advisor that they must put the client’s interests ahead of their own and then don’t. It builds a trust that might not be there if a lower standard is communicated.
The question remains as to whether any regulator or credential licensor (such as the CFP Board) will actually begin to enforce the fiduciary standard.
In my view, if past is prologue, then there is little reason for optimism that this will ultimately be good for consumers. But perhaps the Department of Labor's approach will be different. After all, they at least think something going on right now is wrong and I couldn’t agree more.
This article was originally published on Financial-Planning.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Organizations largely applaud new DOL fiduciary rule

Apr 6, 2016 | Pensions & Investments

By Hazel Bradford

Advocacy groups are mostly in favor of the new fiduciary standard released Wednesday by the Department of Labor.
Deborah Forbes, executive director of the Committee on Investment of Employee Benefit Assets, which represents 100 large plan sponsors, said her members, who are still studying the final rule, welcome it. “We believe that anyone advising participants about their 401(k) assets should be held to the same fiduciary standards as plan sponsors,” Ms. Forbes said.
James Klein, president of the American Benefits Council, said employers appreciate some changes made in the final rule but worry about the “potential chilling effect” if employers cannot provide routine guidance through human resources staff and outside service providers.
The new rule broadens the definition of fiduciary advice for anyone giving investment advice but allows plan sponsors and their advisers to continue to provide investment education without being considered fiduciaries. In a briefing for reporters, Secretary of Labor Thomas Perez said Tuesday the updated rule, now known as the conflict of interest standard, is a “fundamental principle of consumer protection” because it requires anyone giving retirement investment advice to act in their client's best interests. “It's no longer a marketing slogan; it's the law,” he said.
The rule expands the definition of fiduciary investment advice but clarifies that plan sponsors can continue to provide education without triggering fiduciary duties. Plan sponsors with more than $50 million in plan assets can continue to offer investment advice if certain conditions are met, and smaller plans can use best-interest contract exemptions.
Firms providing investment advice to plans must acknowledge in writing that they are acting as fiduciaries. Advisers can continue to receive common forms of compensation, as long as they put their clients' best interest first and disclose conflicts of interest.
Mr. Perez stressed that DOL and White House officials went to great lengths to listen and respond to concerns raised by the retirement service industry and some members of Congress about whether a tougher standard would be too onerous and, ultimately, too expensive for lower-income savers.
“We listened, we learned and we adjusted,” he said.
One of the biggest adjustments was giving advisers a full year to revamp their systems, up from a proposed eight-month implementation period. Compliance will be phased in through January 2018. The final rule also scrapped the idea of including a list of assets that would be covered.
Another “welcome change,” said Karen Barr, president and CEO of the Investment Adviser Association, whose members have supported a fiduciary standard, was that the final rule did not favor low-fee or low-cost options over returns or other considerations.
The new rule allows best-interest contracts to be signed at the same time as other paperwork, and only requires that existing customers be sent a notice of the new standard. The rule also clarifies that there is no bias against proprietary products offered by the parent firm of an adviser.
“I am quite confident that the industry will be able to comply,” said Mr. Perez, who acknowledged that a “small but boisterous minority will remain” opposed to a new standard, but that the rule would withstand any legal challenges.
Sen. Patty Murray, D-Wash., ranking member of the Senate Health, Education, Labor and Pensions Committee, said threats by some members of Congress to undo the new rule would not advance. “We are not going back,” Ms. Murray said.
The new rule is posted on the Federal Register.

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Frequently asked questions about the DOL fiduciary rule

Apr 5, 2016 | Investment News

By Elizabeth MacBride

Q:What are the significant changes under the new rule?
A: Under current rules, some advisers in the retirement industry operate under a standard that requires advice to be suitable for a client, but not necessarily in the client's best interests.
Some retirement investment advice already requires a fiduciary standard, but the advice is narrowly defined as regularly occurring recommendations on specific plan investments with a mutual understanding that the advice is individualized and serves as the primary basis for investment decisions.
The new DOL rule would broaden the definition of fiduciary investment advice. Under the proposed rule, one-time investment consultations or recommendations of other advisers could be considered subject to a fiduciary standard. Rollover recommendations also would be considered fiduciary advice.
Q: Why is the DOL changing the rule?
A: The DOL believes the current rules lead to conflicts of interest, which in turn result in higher costs for people saving for retirement. The DOL says conflicts lead, on average, to about 1 percentage point lower annual returns on retirement savings and $17 billion in losses every year.
Q: When is the last time the rules were changed?
A: The basic rules governing retirement investment advice have not been changed since 1975, according to the DOL. The DOL believes the rules should change as a result of the shift in the private retirement system away from defined-benefit plans and into self-directed IRAs and 401(k)s.
Q: How long will the industry have to make the changes required by the rule?
A: The proposed rule included an implementation time frame of eight months, but that could be extended. Regulators in Washington sometimes extend initial compliance deadlines.
Q: Who does the rule apply to and what does it say?
A: The proposal requires professionals receiving compensation for providing advice to individuals or to an employer with a retirement plan to act in their clients' best interests, or act as a fiduciary.
Q: Which kinds of professionals are subject to the rule?
A: The definition is based on the advice given, not the type of person giving the advice. The fiduciary can be a broker, registered investment adviser, insurance agent or other type of adviser.
Q: How are retirement plans defined?
A: 401(k)s and other employer-sponsored plans, IRAs and other tax-deferred accounts, such as health savings accounts, will be included in the rule.
Q: Could the outcome of the presidential election affect the rule?
A: A new administration can always change or roll back a rule. But the further the Department of Labor and the industry get in implementing the rule, the harder it will be to change it.
Q: What are some of the legal implications, especially for cases that are arbitrated?
A: Most disputes in the investment advisory industry are resolved by arbitration, and that is still likely to be the case. Advisers still will write the contracts their clients sign, which can require arbitration. But investors under the rule will have stronger ground to stand on: Because advisers and brokers will be required to sign contracts stating they put their clients' best interests first, investors have greater legal recourse.
Q: What are the consequences for an adviser who breaches fiduciary duty?
A: Fiduciaries are subject to personal liability for losses caused by a fiduciary breach. Fiduciaries also are subject to potentially large excise taxes for engaging in prohibited transactions, unless they qualify for an exemption. ERISA currently prohibits fiduciaries from completing transactions that involve conflicts of interest unless they disclose the conflicts and operate under the oversight of an independent fiduciary.
Q: Are there consequences for others in the retirement system, such as employers who sponsor plans, who are involved in conflicted advice?
A: Yes. The IRS can impose an excise tax on transactions based on conflicted advice. The Internal Revenue Code imposes an excise tax and can require the correction of such transactions involving plan sponsors, plan participants and beneficiaries, and IRA owners.
Q: Who is exempt from the new rule?
A: The DOL has said four groups are exempt:
• People who do not represent themselves to be ERISA fiduciaries, and who make it clear to the plan that they are acting for a purchaser or seller on the opposite side of the transaction from the plan, rather than providing impartial advice.
• Employers who provide general financial or investment information, such as recommendations on asset allocation, to 401(k) participants, or investment education.
• People who market investment option platforms to 401(k) plan fiduciaries on a non-individualized basis and disclose in writing that they are not providing impartial advice.
• Appraisers who provide investment values to plans to use only for reporting their assets to the DOL and IRS.
Q: Will commissions be allowed on sales of securities in retirement plans?
A: Yes. But based on what the DOL has said so far, the adviser and the client would be required to enter into a written contract with provisions including that all advice be in the best interests of the client, that conflicts be clearly disclosed and that procedures be in place to encourage advisers to make recommendations in the client's best interests.
In the rule, this is known as the Best Interest Contract Exemption (BICE).
Q: What is the Best Interest Contract Exemption?
A: The Best Interest Contract Exemption (BICE) would allow advisers to continue working on commission. To qualify for the exemption, advisers would have to:
• Enter into a BICE with their clients.
• Provide the client with comprehensive disclosure of any conflicts of interest.
• Mitigate conflicts of interest in adviser compensation.
• Offer the client a range of investment options across asset classes.
• Suggest only investment products covered by the BICE. While the list of covered insurance products is not yet final, the draft exemption includes mutual funds and insurance and annuity products.
• Acknowledge that they are fiduciaries and are working in their clients' best interests.
Q: What disclosures are required under BICE?
A: In addition to this written contract, the adviser would be required to provide comprehensive disclosures, such as:
• Payments from sales
• Point-of-sale annual reports
• Mitigate conflicts of interest in adviser compensOne-, five- and 10-year cost projections for each product purchased
The contract also must direct the customer to a webpage disclosing the compensation arrangements entered into by the adviser and firm and make customers aware of their right to complete information on the fees charged.
Q: Which pay structures are most advisable under the new rule?
A: Acceptable pay models include leveled compensation, flat fees and percent-of-assets compensation.
Q: Is any pay structure forbidden?
A: No. But the DOL advises firms to avoid using quotas, bonuses or contests to compensate advisers.
Q: What is the principal transaction exemption?
A: In addition to the Best Interest Contract Exemption, the proposal has a new principles-based exemption for principal transactions, and maintains or revises many existing administrative exemptions. The principal transactions exemption would allow advisers to recommend certain fixed-income securities and sell them to the investor directly from the adviser's own inventory, as long as the adviser adheres to the exemption's consumer-protective conditions.
Q: What is the low-fee exemption?
A: The low-fee exemption would allow firms to accept payments that otherwise would be considered conflicted when recommending the lowest-fee products in a given product class, with fewer requirements than the Best Interest Contract Exemption.Sources: American Funds, Department of Labor, The New York Times

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Critics say DOL fiduciary rule makes too many industry concessions

Apr 6, 2016 | Investment News

By Jeff Benjamin

The rule the Department of Labor published Wednesday raising investment advice standards for retirement accounts is so watered down in response to industry concerns that investors may not be any better off, critics say.
Even though the new regulation would boost the advice bar for brokers, the final rule clarifies that there is no bias against selling proprietary products. It also requires fewer disclosures to clients than the proposed version of the rule, and doesn't specifically spell out the need to disclose the amount of fees and other charges being paid.
“The final rule has moved significantly away from the assumptions consistent with trust law and ERISA,” said Knut Rostad, president of the Institute for the Fiduciary Standard. “They have adopted the assumptions of the industry, which is that there are important benefits of conflicted advice.”
The final rule requires advisers to direct clients to a web page for “information on the fees charged,” which could allow advisers to simply disclose what factors were involved in coming up with the fees and expenses, instead of mandating actual disclosure of what people will pay, Mr. Rostad said.
DOL Secretary Thomas Perez said Tuesday that the final regulation was a “streamlined” version of the department proposal. He said the agency listened to critics of the proposal and edited the rule to make it “workable and doable.”
The rule requires advisers to act in the best interests of clients in 401(k) and individual retirement accounts. Brokers currently only have to ensure their recommendations are “suitable” for clients, rather than in their best interests.
Financial industry interest groups lobbied hard against the rule, which it said would significantly increase liability risk and regulatory costs for advisers, and reduce advice options for smaller investors.
So far, most industry groups that opposed previous versions of the rule, such as the Financial Services Institute, have been mum on the final regulation's specific changes.
Many proponents of a rule change, including the Financial Planning Coalition and the Consumer Federal of America, said they believe the final rule is balanced on the whole.
“Our initial review indicates that the rule is a huge win for consumers,” said Micah Hauptman, CFA financial services counsel.
But others argue the industry concessions gutted the rule's intended consequences, which is to ensure advisers put client interests before their own profits when handling retirement savings.
“While the DOL deserves so much credit for taking the lead on this crucial issue while the Securities and Exchange Commission twiddles its thumbs, there are some serious issues with its rule,” said Andrew Stoltmann, a plaintiff's attorney with an eponymous law firm. “There are things brokers can do with retirement accounts that no real fiduciary could ever do.”
For instance, firms can sell high-fee variable and indexed annuities in individual retirement accounts, he said. He also mentioned brokers being able to still recommend proprietary products.
These sorts of activities have been at the crux of many of the problems and abuses seen in litigation and arbitration against brokerage firms over the years, Mr. Stoltmann said.
SOME ADVISERS PRAISE RULE
Independent financial advisers who already abide by a fiduciary standard praised the final rule.
“The DOL has indeed taken a major step toward a more secure and dignified retirement for millions of Americans,” said Harold Evensky, chairman of Evensky & Katz/Foldes Financial.
The agency “obviously carefully listened and responded to the concerns raised by many financial service participants regarding the original proposal, including easing the compliance process but maintaining a strong, legally enforceable best interest standard,” he said.
Ron Bernardi, president and CEO Bernardi Securities, a broker-dealer that also owns RIA Bernardi Asset Management, said it appears the best interest contract exemption that deals with commission-based trades will be less onerous than how it was originally proposed.
If so, Mr. Bernardi's firm may not need to move all of its brokerage clients over to its RIA, a prospect that would have increased costs for small clients.
“We might have to revisit that,” he said on Wednesday after reading initial information about the rule.
Dick Pfister, founder and CEO of AlphaCore Capital, an RIA that works with retirement accounts building alternative investment portfolios, said the rule should have been implemented a long time ago.
“The more you can act as a fiduciary, the better it is for your clients,” he said.
One industry group said the final rule doesn't go far enough to meet financial company concerns.
The Equity Dealers of America, an industry group that represents Raymond James Financial, Janney Montgomery Scott and other mid-sized and regional securities dealers and investment banks, is asking Congress to review the measure. In a statement, its executive director Chris Iacovella said the group's considering legal action.
“By DOL's own admission, it has not identified a single market failure that needs to be corrected,” Mr. Iacovella said. “It has put forth a rule that reduces access to financial advice for millions of low-income Americans and retirees, damaging their ability to save for and live in comfortable retirement.”
The group said the rule also “picks winners and losers among financial firms,” and it suggested the nation's largest investment banks could “get richer” as a result of the new requirements.

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DOL Unveils Final Version of Fiduciary Rule

Apr 6, 2016 | Ignites

By Emile Hallez

The Department of Labor will publish the final version of its long-awaited fiduciary rule today, ending a years-long process that has prompted an enormous amount of opposition from the financial services industry.
In response to that feedback, the DOL made numerous changes to the rule proposed last April that will likely be welcomed by the industry, Labor Secretary Thomas Perez said Tuesday afternoon during a call with reporters.
Modifications include:
Clarification about when advisors who rely on commissions must sign “Best Interest Contracts” with clients
The conditions under which firms can sell proprietary products
The size of a defined contribution plan that qualifies a sponsor as a “sophisticated” investor, therefore requiring no contract
The elimination of transaction disclosures laying out one-year, five-year and 10-year projections of account fees and returns
Advisors and broker-dealers serving IRA and 401(k) clients have until Jan. 1, 2018, to comply fully with the rule — a deadline that was extended by eight months, Perez noted.
“We got smarter,” he said. “We listened, we learned and we adjusted.”
The rule is designed to protect investors from conflicted advice in the 401(k) and IRA markets, requiring advisors to put clients’ best interests ahead of their own. A White House analysis cited by DOL concluded that conflicts of interest end up costing retirement savers 1 percentage point in unrealized savings, equivalent to $17 billion per year.
“Putting customers first is no longer a marketing slogan — it’s the law,” Perez said.
An accompanying regulation — the Best Interest Contracts Exemption — would continue to allow advisors and broker-dealers to work on a commission basis, provided they sign contracts during the account-opening process and agree to put clients’ interests first.
The timing of when those contracts must be executed is among the most notable changes in the final version of the rule. Many opponents vociferously objected to provisions in the proposal that suggested that advisors would have to immediately present “best interest" contracts when prospective clients walk through their doors. The change means that consumers shopping around will not have to sign contracts with every advisor they contact.
The DOL also removed a list of approved asset types under the Best Interest Contract Exemption, Perez said.
“We got a lot of feedback that folks didn’t like those [restrictions on] assets, so in the final rule the list is gone,” he said. Under the proposed version, Best Interest Contract Exemptions applied primarily to mutual and exchange-traded funds, certain annuity products, bank collective trusts, publicly traded stocks and bonds, among other common investment and bank products. It generally disallowed any options, limited partnerships or other such strategies. The change gives advisors greater latitude in recommending products.
Further, advisors and firms, such as bundled recordkeepers and IRA providers, will be able to recommend their own products, including mutual funds and variable annuities, without signing contracts with clients, provided the limited menu of products they recommend can satisfy the requirements of the rule’s best interest standard.
“There is no bias against proprietary products,” Perez said. “The key is, if you’re selling a proprietary product … you have an obligation to put your client’s best interest first.”
Also in the final version of the rule, the size of a 401(k) or other DC plan that qualifies as a sophisticated investor was reduced from $100 million in plan assets to $50 million. That change will expand the number retirement plan sponsors that can work with an advisor without signing best interest contracts — as long as certain other conditions are met, according to the DOL.
The final rule will also not require firms to sign contracts with plans covered by the Employee Retirement Income Security Act, as long as the firm acknowledges in writing that it and its advisors are acting as fiduciaries providing investment advice.
Firms will also be required to send notices to their existing clients that they have new regulatory obligations, Perez said.
“A simple e-mail or letter, which does not require the entry of a contract, will suffice to address the issue of the existing customers,” he said. “I am quite confident that the industry will be able to comply with the streamlined rule.”
Because the rule will not be in force before the end of President Obama’s term in office, it is unclear whether the next president could halt it.
The rule is the first major update to a 41-year-old regulation. In 1975, shortly after Congress approved the Employee Retirement Income Security Act, the DOL established a five-part test to determine whether an advisor is a fiduciary. That test, which was created when IRAs were in their infancy and the 401(k) regulation was yet to be established, dramatically narrowed the number of advisors considered to be fiduciaries under Erisa, the DOL has explained.
Under that test, advisors had to make individualized investment recommendations to a client on a regular basis, with both parties understanding that the advice was meant to be the primary basis for investment decisions.
The financial services industry has criticized the DOL heavily since the rule was first proposed. Now that it is final, one option may be for opponents to pursue a legal challenge — and some groups, including the American Council of Life Insurers, have reportedly retained lawyers ready to do so, as previously reported.
Critics have argued that the proposed version heavily favored fee-based account charges for advice, was overly complex and would discourage advisors from accepting business from clients with small accounts. The result would ultimately restrict investment advice for those with the least amount of savings, they have contended.
“I refuse to believe that just because your savings are small they are not worthy of big protections,” Perez said Tuesday.
The DOL received thousands of public comments, not counting many more petitions and form letters, in response to the proposed rule, many of which appear to have come from individuals. Many such letters, however, are signed anonymously, and the authors often seem to havemisunderstood the scope of the proposed rules.
For example, one comment letter, which is similar to numerous others, stated, “The government has no right to touch or determine how we spend our retirement.”
Early last year, Obama tasked the DOL with proceeding with the rule, which had been delayed for years. The president noted that advisors lacked a standard of care that is applied to other professions.
“Both your doctor and your lawyer are required to look out for you,” Perez said on Tuesday. “If you had an illness, or you had cancer, you wouldn’t want your doctor to tell you what’s suitable for you. You’d want to know what’s the best plan to save your life.”

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Retirement Savers Get Added Protections From New Rules For Brokers

Apr 6, 2016 | Investor's Business Daily

By Paul Katzeff

Individual investors won some but not all of what was hoped from a sweeping new rule that tightens conflict-of-interest standards for brokers. Those brokers manage trillions of dollars in retirement accounts such as 401(k)s and IRAs, creating compliance headaches and liability issues for the financial industry.
Still, the new rules are more lenient than the financial industry had feared they would be. And that leniency led investors to bid up stocks on Wednesday of many asset managers, brokers and insurers.
Life insurer Primerica (PRI) soared nearly 7%. Broker and financial adviser Ameriprise Financial(AMP) rose 1.5%. T. Rowe Price (TROW) rose 1.4%. “Several of these stocks are trading up today,” said Morningstar analyst Greggory Warren. “The rule impact is being seen as not as onerous as feared.”
Despite industry relief, overall the rule is seen as a victory for individual investors.
The final Labor Department (DOL) fiduciary rule, which follows months of public and industry views on its proposal, requires brokers to act in the best interests of clients when providing retirement advice. The Obama administration claims that will lower costs and boost returns for investors.
“Today’s rule ensures that putting clients first is no longer a marketing slogan,” Labor Secretary Thomas Perez said in a conference with reporters. “It is the law.”
The fiduciary standard of behavior creates new grounds for complaints by investors who feel they have been short-changed by their broker. At the outset of a brokerage relationship, a broker can still require a client to agree to take any disputes to arbitration rather than to court. But now the broker has to meet a higher standard of professional behavior, says Andrew Stoltmann, a Chicago securities-fraud attorney.
“(The new rule) creates a strengthened cause of action for those suing their brokers,” Stoltmann said. The new rule does not mean that DOL itself will become more active as a securities cop, Stoltmann added.
The government made some concessions in its final rule after months of criticism from the financial industry.
The Investment Company Institute, a group representing mutual funds, last summer called the proposal so complicated that it is unworkable. Brokerages charged that the requirement would add costs that make retirement advice unaffordable for many lower- and middle-income investors.
Some financial firms will probably benefit, while others are expected to be hurt.
Discount brokerages such as Charles Schwab (SCHW) and TD Ameritrade (AMTD) stand to be helped, Morningstar predicted. So are companies that sell a lot of index and exchange traded products, like State Street (STT), BlackRock (BLK) and Vanguard. And robo-advisors are also likely to gain business. Brokers would be compelled to use their low-cost products and services rather than high cost alternatives.
T. Rowe Price stock was up because its funds are relatively good performers, meaning they are more likely to be acceptable investment recommendations by brokers, Warren said. Also, the firm has been bolstering its sales staff in recent months, to boost its IRA business, he added.
In its new rule, the Labor Department addressed some industry concerns. The originally proposed eight-month deadline for compliance is gone, replaced by a longer, “phased” implementation timetable.
Also modified is a requirement for new clients to sign a contract in which any broker conflicts are disclosed. These would include the broker disclosing that high-commission products might be offered even though lower-cost alternatives are available. The final rule says the contract does not have to be signed until a client actually opens an account. The proposed rule called for the contract to be signed when the client first had contact with a broker.
Another item dropped from the final rule: a proposed list of acceptable assets that advisors can recommend instead of certain high-risk investments. And a widely expected prohibition of in-house investment products has been dropped.
“I’m a little disappointed the DOL has caved on the issue of whether firms can recommend proprietary products like annuities,” Stoltmann said. “No real fiduciary could do this. I think the DOL caved on a very crucial issue.”What The New Rule Does
The new rule basically extends a fiduciary standard mainly to brokers when they provide investment advice for retirement accounts. A fiduciary standard requires brokers to act in the best interests of clients. Registered investment advisors (RIAs) are already subject to the fiduciary standard, but a stricter version than imposed by the new rule on brokers, said Stoltmann.
The new rule takes aim at IRAs — particularly on money that is transferred or rolled over into IRAs from workplace retirement accounts such as 401(k)s, says Skip Schweiss, TD Ameritrade head of investor advocacy.
Under the old rule, brokers could recommend investments that were merely suitable for clients. The DOL says that the old standard allowed brokers to base recommendations on what would generate commissions for them, even if a better-performing, lower-cost investment was available.
The White House — which supports the tighter standard — said in February 2015 that investments made on the basis of conflicted advice under the old rule returned roughly 1 percentage point less a year on average than investments made on the advice of fiduciaries.
With an estimated $1.7 trillion of IRA assets invested in the type of products that generate conflicts of interest, the White House estimated that the aggregate annual cost of conflicted advice is about $17 billion.
“A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12% of the value of his or her savings if drawn down over 30 years,” read the White House report. “If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than five years earlier.”
With a $100,000 rollover for people age 55 to 64 in 2012, a 12% loss would cost the average investor $12,000.
Morningstar forecast a mixed impact for active asset managers, including AllianceBernstein (AB),Cohen & Steers (CNS), Eaton Vance (EV), Federated (FII), Janus Capital Group (JNS) and Legg Mason (LM). The same applies to full-service wealth managers, including Bank of America (BAC),Morgan Stanley (MS), Raymond James (RJF) and Wells Fargo (WFC).
These companies have product lineups that include both higher and lower cost products.Asset Fees, Robo Boom?
And some impact could differ from what’s expected. Many full-service brokerages could replace commission-based IRA fund sales with IRAs that generate fees on assets. “As fee-based accounts can have a revenue yield upwards of 60% higher than commission-based, this could translate to as much as an additional $13 billion of revenue for the industry,” Morningstar reported.
Also, full-service wealth managers could stop serving clients with low IRA account balances. Those clients could take an estimated $250 billion to $600 billion in assets to robo-advisors. That could push a number of robo-advisors above the $16 billion to $40 billion asset base that Morningstar estimated they need to become profitable.
Even within groups that could be hurt by the new rule, like active asset managers and insurers, some companies could benefit. “(Firms) with moats will gain market share from their less competitively advantaged peers or … will be able to adjust their business model to offset the negative financial effects of the rule,” Morningstar reported.

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Tech Firms Are Both Catalyst and Beneficiary of DOL Fiduciary Rule

Apr 6, 2016 | WealthManagement.com

By Ryan W. Neal

The Department of Labor released thefinal version of the fiduciary rule on Wednesday, and though it was was more lenient than many expected, wealth management technology vendors see the rule as a catalyst for widespread adoption of their products by financial advisors.
In fact, many think a fiduciary rule wouldn’t even be possible for advisors if not for the massive strides in technology over the last decade.
“You couldn’t even fathom this 10 year ago,” said Bob Ward, the chief revenue officer of Vertical Management Systems, a data and account aggregation company. A key aspect of the fiduciary rule is disclosure of fees; according to Ward, “much of the industry runs on antiquated technology that can’t deliver the level of fee specificity required by today’s investors.”
Another issue is scale. A common criticism of a fiduciary rule is that it would limit an advisor's ability to profitably service small accounts. Oranj CEO David Lyon said the answer is to take on more customers, which is possible now with automated technology.
“They have to find a way to shrink the amount of time they spend on client management to be able to serve more clients,” Lyon said.
Lyon added that technology can also play a role helping advisors determine what investments are suitable for clients under the new rule. Using new tools to collect a client’s goals, aggregate accounts, assess risk tolerance into a single location and allocate assets from a single digital platform, algorithms can quickly and agnostically determine show advisors which products are, or not, in the best interest of the client.
In addition to making it possible for advisors to comply with a fiduciary rule, technology companies have supported regulators’ efforts. Betterment and Wealthfront, two of the leading automated investment startups, have both written letters (here and here) voicing support for a fiduciary rule and arguing that technology is the answer to providing advice to a large number of small investors.
The Financial Industry Regulatory Authority, the self-regulator funded by Wall Street,doubted the ability of so-called robo advisors to offer conflict-free advice, but the DOL has continually touted these platforms as the means to uphold clients’ best interests, particulary in smaller investment accounts. In a June congressional hearing, DOL secretary Thomas Perez named Wealthfront’s business model as, “a platform that enables them to lower their fees, operate as a fiduciary and do well by doing good.”
“Technology is, I think, a linchpin to the innovation that’s enabling more people to get access to advice.”
Just as technology helped make a fiduciary rule possible, the firms providing it may also stand to benefit the most from the implementation of the rule. Reducing fees, increasing transparency and improving the customer experience tend to be major points in tech companies’ sales pitches, and many say the DOL's rule validates their objectives.
John Wise, the CEO of InvestCloud, said the rule is a great opportunity for automated technology providers. Wise said traditionally about 80 of the cloud based apps sold by InvestCloud were for client management and communication.

“Now 60 percent of that market has gone to client automation, largely driven by the DOL and legislation moving [the industry] from commissions to fee-based advice,” Wise said. “It is reinforcing what we’re already doing… If you automate things, you get the best possible outcome instead of the worst.”
Bing Waldert, the managing director at research firm Cerulli Associates, wrote in a March research report that the fiduciary rule would "ultimately lead to evolution of products and platforms” as large companies look to serve small accounts on a flat-fee basis, but the company doubted the effects would be immediately felt – especially now that the final rule’s deadline was pushed to January 2018.
The DOL itself seems to recognize the positive impact its rule will have on technology. In a speech at the Brookings Institute, Perez said he believes the DOL’s fiduciary rule will encourage firms to take advantage of technology to develop new tools and strategies for accommodating small investors.
Rob Foregger, the co-founder of digital advice firm NextCapital, acknowledged there could always be unintended consequences to new rules, but felt confident that the DOL's fiduciary rule will accelerate technology-driven innovation for the wealth management industry.
“It is our view that technology will be critical to implementing the New Fiduciary rule across the $17 Trillion retirement marketplace,” Foregger said. “Financial technology has historically served the needs of high-net-worth investors, but emerging digital advice offerings are dramatically increasing access to scalable personal advice and making the cost of personal advice affordable to all Americans.”
Aaron Klein, the CEO of Riskalyze, added that previous versions of the rule, which banned specific products from IRAs, would have been harmful to technology startups. However, the final draft from the DOL seems to have heard the criticisms and removed these restrictions.
“If advisors want to recommend products with variable compensation instead of flat compensation, they will still have to prove that they are acting in a client’s best interests, and they will be exposed to massive litigation risk if they fail to do so,” Klein said. “This simple approach is the epitome of what regulation should do: establish a broad principle, and allow the market to do its work.”

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Fiduciary rule adds more oversight to plan sponsor responsibilities

Apr 6, 2016 | Employee Benefit News

By Andrea Davis & Paula Aven Gladych

Retirement plan industry experts are greeting the Department of Labor’s final fiduciary rule with a mix of caution and optimism, with some calling it a “big win” for 401(k) plan sponsors and participants and others saying it has the potential to confuse employers and disrupt their ability to engage employees in retirement planning.
While the rule is “extremely good” for retirement plan participants and those who have IRAs, it may have the unwanted effect of confusing plan sponsors, says Matt DiGennaro, founder and CEO of Seabridge Wealth Management, adding it’s now incumbent upon plan sponsors to consult with an ERISA attorney to ensure their 401(k) plan advisers are adhering to the rule.
“It’s going to be incumbent on plan sponsors to reach out to an ERISA attorney – not their brokers, not their advisers, but someone who is independent and objective – and understand if their current broker or adviser is adhering to the new standards,” he says, adding that he’d advise employers to contact an ERISA attorney within the next 30 days.
“It’s one thing to understand what the rule is, but the most important part is to ensure your broker is adhering to the new fiduciary-standard rule,” says DiGennaro.
The fiduciary regulation, published in its final form today, dropped the contract requirement for ERISA plans and their participants and beneficiaries. Firms must still acknowledge – in writing – that they, and their advisers, are acting as fiduciaries when providing investment advice to a plan or beneficiary, but no contract will be required.
“They did that to smooth the administrative process for brokerage firms,” says Robert C. Lawton, president of Lawton Retirement Plan Consultants, who calls the final rule a “win” for plan sponsors. “That doesn't mean that brokerage firms won't have to act as fiduciaries to ERISA plans – they will – and will have to acknowledge that in writing. It means they won't have to acknowledge that responsibility in a separate client contract.”
The American Retirement Association, a professional association of actuaries, pension plan professionals and retirement plan advisers, also calls the changes the DOL has made to the final rule “a big win” for 401(k) plan participants and sponsors. In particular, the group is pleased with the rule’s special exemption for advisers and firms that receive only a “level fee” for the advice they provide in conjunction with the decision to roll over assets from an employer-sponsored plan such as a 401(k), so long as certain conditions are met, including an acknowledgement that the recommendation is in the customer’s best interest.
DiGennaro expects the rule to accelerate employers’ adoption of RIAs as retirement plan advisers. “Being an RIA – whether you’re registered with the SEC or by the individual states – you’re already a fiduciary who must, by law, fully disclose all fees upfront and in writing and eliminate conflicts of interest,” he says.
The American Benefits Council, meanwhile, is concerned about what it says is “the potential chilling effect of the new standards on employee engagement if employers are not able to continue working effectively with employees to strengthen their use of retirement programs and improve their overall financial well-being,” said Council president James A. Klein. “It is critical that employers be able to provide routine and helpful guidance through personal interaction of employees with both corporate human resources staff and outside service providers.”
Department of Labor Secretary Thomas Perez announced yesterday that for the first time, anyone providing investment advice for retirement plans will be designated a fiduciary, requiring advisers, planners and wealth managers to place their clients’ financial interests above their own.“The RIA industry is already set up for this so it should be a benefit to independent fiduciaries who are RIAs.”
“With the finalization of this rule we are putting in place a fundamental consumer protection into the American retirement landscape,” Perez said. “It’s in Americans’ best interest. It is a huge win for the middle class.”
Under the current system, advisers to IRAs and broker-dealers have to follow a suitability standard of conduct, meaning they can find products for clients to invest in that are deemed “suitable,” even if they come with higher fees.
“Before this rule, firms were allowed to offer incentives to retirement advisers to steer investors into accounts with higher fees and lower returns,” said Jeff Zients, director of the White House National Economic Council.
The Department of Labor has come under fire from many in the industry, particularly industry trade groups, insurance companies and large wealth management firms, saying that the rules, as originally proposed, would force brokers and IRA advisers to stop serving clients with small account balances, limiting their access to good financial advice. Many have moved to block the proposal since its first incarnation in 2010. Numerous bills have been proposed in Congress that would take the teeth out of this rule if they managed to escape President Barack Obama’s veto, which is unlikely to happen since he voiced his support for a fiduciary rule early in 2015.
Perez calls these groups a “small and boisterous minority.”
He scoffed at the notion that larger firms would stop serving small or moderate savers, saying there are plenty of advisers out there who have contacted the Department of Labor saying they would love to pick up that business.
The DOL did take much of what it heard during hearings about the fiduciary rule to heart.
“We have streamlined, simplified and clarified our rule while remaining true to our North Star,” said Perez. That would not have been possible without the constructive engagement of consumer and industry groups and other stakeholders, he added.
One section of the proposed rule that had the financial industry riled up was the mechanics of the best interest contract exemption. The proposal would have required that investors sign an extensive contract with the adviser and the firm the adviser works for the first time they met. In that contract, they would have had to disclose compensation and fee information, inform clients that the adviser and firm must act in a fiduciary capacity and include a list of steps the adviser would take to mitigate potential conflicts of interest.
In the final rule, advisers and their companies don’t have to enter into such a contract with investors until they open an account with them.

The other fear was that the fiduciary rule would prohibit insurance companies from taking advantage of the best interest contract exemption if they sell proprietary products such as fixed income or variable annuities. Under the new rule, advisers recommending any asset can take advantage of the exemption to continue receiving the most common forms of compensation.
The DOL believes that these types of products make up an important part of the retirement marketplace. “Many people are looking for a steady stream of income,” said Perez. The fiduciary rule is not asking one insurance company to advise clients about the proprietary products offered by another insurance company, but they do have to have policies and procedures in place to make sure people understand that when they enter into a conversation with that company, there is a limited book of business that company sells, he added. Even in that situation, the advisers are obligated to only make recommendations that are in a client’s best interest.
“The standard is the same regardless of context. Make sure you are providing information in the client’s best interest. That doesn’t mean you have to recommend the lowest priced car,” said Perez.
“For different people, depending on their risk profile, depending on their age and the asset allocation they may choose, the issue of what is in their best interest will be different. For some people, it may be that an annuity product is the right product. For others, a simple index fund is the best product,” Perez said.]
The BIC exemption will also be available for advice to small businesses that sponsor 401(k) plans, as well as for advice to IRA customers and plan participants. Also under the final rule, recommendations to plan sponsors who manage more than $50 million in assets will not be considered investment advice if certain conditions are met so they would not require an exemption.
The rule also streamlines and simplifies the required disclosures. The transaction disclosure is simplified to focus on the firm’s conflicts of interest; the website disclosure is streamlined but still designed to enable third parties to help customers evaluate different firms’ practices that may affect advisers’ conflicts of interest; and the annual disclosure is eliminated entirely.
Perez also announced the rule will go into effect on Jan. 1, 2018, giving broker-dealers and wealth management firms more time to comply.

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DOL Punts On Fiduciary Rule Change: Financial Advisors' Daily Digest

Apr 6, 2016 | Seeking Alpha

By Gil Weinreich

Summary
All the gnashing of teeth about sweeping fiduciary change proves to be so much sound and fury.
Barclays is first to take blockchain retail.
Advisor and SA contributor Gary Gordon says a weak economy will heavily pressure corporate profits.
The chorus of news reports and commentary - anticipating a wholesale change in the way a large proportion of financial advisors do business - sang in perfect harmony. I myself plead guilty, having written about the proposed rule changeas though it were a done deal on Monday. I was in good company: "The Rulebook is About to Change," said a Wall Street Journal report the same day. What is said of baseball - that it ain't over till it's over - is a truism about the game of life. That's a lesson that both fans and detractors of the various presidential candidates could take to heart right now.
Looking over the Department of Labor's cheat sheet on the final rule change, I was stuck by how little has changed - despite so much gnashing of teeth by DOL's Phyllis Borzi and other rule-change advocates. For example, there will be no push toward lower-fee products:
"The Department did not adopt the low-fee streamlined option considered in the proposal…"
Advisor-blogger Josh Brown seems to have fairly summarized the new regime:
"Biggest impact is added disclosures on websites. Seriously."

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New Fiduciary Rule – $14 Trillion In Assets To Be Impacted

Apr 6, 2016 | Value Walk

By VW Staff

Dave Lutz opines:
Headlines have The Labor Department unveiling a final version of the so-called fiduciary rule today at11:30 – Applying a fiduciary standard means the broker must put his customer’s interests ahead of his own. This is different from now, when nothing stops a broker from selling you what earns him the highest commissions – “At stake are $17 billion in annual fees that the financial industry overcharges for advice on retirement-saving plans, according to the president’s Council of Economic Advisers”
“A few things are known: Fee-based is in, commissions are out; more paperwork is in and gut-based trading is out” – “RIAs have to ‘fess up to the actual cost of the investments they sell” – “expected to be the most disruptive piece of regulation to come down the pike since the Employee Retirement Income Security Act of 1974”
·         Large securities firms that focus on affluent investors have already converted many customersfrom commissions to fees, a shift that is expected to be accelerated by the new rules. They could be in better shape than competitors –> BAC, MS, LPLA, RJF
·         Big providers of index mutual funds and exchange-traded funds, as well as other low-fee funds with solid returns, may benefit from the rules as investors seek to cut costs —> BLK, TROW, WETF
·         Meanwhile, the rules could accelerate the movement away from money managers that primarily offer funds that actively bet on individual stocks, bonds and other assets —> BEN, LM, WDR
·         Big providers of variable annuities could take a hit as the rules may make it more difficult to sell commission-based retirement income products —-> AMP, LNC, MET, PRU
New Fiduciary Rule
AFR opines:
After years of effort, and against massive opposition by some industry players, the Department of Labor has come out with a rule requiring retirement investment advisers to give honest advice – the kind that puts the best interests of their clients first.
Today’s announcement is a huge victory for American workers and retirees. Under the old rules, which have not been updated for forty years, some investment advisers have been held to a best-interests (or fiduciary) standard, but many others have not. Brokers, insurance company salespeople and others have taken advantage of loopholes to promote high-commission investment products that benefit the seller over alternatives that better serve the investor with lower fees, higher returns, or fewer risks. The cost of this kind of conflicted “advice” can run into the tens or even hundreds of thousands of dollars for an individual worker or retiree, and it adds up to more than $17 billion dollars a year for retirement savers in the aggregate, according to the White House Council of Economic Advisers.
The DOL’s new rule closes these loopholes. It has the potential to deliver significant benefits to middle-income Americans in a time of slow wage growth, when many people have trouble setting money aside for retirement in the first place. Support for the rule is widespread: in one major demonstration of that support, more than 225,000 people signed a set of petitions organized by CREDO Action, MoveOn Political Action, Americans for Financial Reform, and Public Citizen, and delivered to Congress and the Labor Department.
The rule is favored by leading groups representing retirees and workers, and by many financial professionals and firms that already adhere to a fiduciary standard. By their example, they show that it is perfectly possible to do so while profitably providing advice to ordinary retirement savers – contrary to the claims of lobbyists for those industry elements that have grown accustomed to the inflated profit opportunities of the regulatory status quo.
Opponents of this rule have taken to calling it “unworkable.” By that they simply mean that it will require them to change a business model that is inherently deceptive and exploitative. The DOL rule is both workable and, very plainly, the right thing to do.
Jamie Hopkins, Retirement Income Program Co-Director at The American College, helped develop the Retirement Income Certified Professional® (RICP) designation notes:
The rollout of the Department of Labor’s new fiduciary rule will impact the entire financial services industry, from insurance agents, to broker-dealers, banks, investment advisers, employers and retirement plan administrators. About $14 trillion in retirement savings could be affected by the rule. The American College of Financial Services Jamie Hopkins, a leading retirement income professor….
Why: The DOL Conflict of Interest Rule will be one of the most impactful changes to the financial services industry in the past 40 years.
Prof. Hopkins om what the fiduciary rule will entail and discuss how its implementation will likely lead to major changes. Of note:
• The rule will hasten the move of some companies away from compensation models based on product sales to compensation models based on financial advice.
• For the first time, IRA investment, asset allocation and distribution advice will be subject to a fiduciary standard of care.
• The rule will have activities that are exempt from the new fiduciary duty such as for providing education, “order taking”, working with fixed products and certain activities falling under a Best Interest Contract (BIC) exception.

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Other Coverage

Here's what the Obama administration's new $12 trillion rule means for your money

Apr 6, 2016 | Business Insider

By Kathleen Elkins

On Wednesday, the US Department of Labor announced a new fiduciary rule, which will require investment advisers to put client interests above their own when it comes to investment choices for retirement accounts.
"The DOL regulation attempts to 'level the playing field' for everyday investors who hold some $12 trillion in IRA and 401(k) plans when it comes to their dealings with financial advisers," reports Business Insider's Elena Holodny.
A 2015 report from the White House Council of Economic Advisers (CEA) estimated that fees and conflicted advice costs American middle-class families about $17 billion per year, and decreases annual returns on retirement savings by 1 percentage point — an effect the new rule is meant to mitigate.
Here's how the new rule may affect you:Your financial advisers are now subject to the fiduciary standard when it comes to overseeing retirement accounts
Before the rule, financial advisers were subject to a looser suitability standard when overseeing retirement accounts, meaning that they were obligated to recommend investments suitable for your situation. Now, brokers, registered investment advisers, insurance agents, or other types of advisers are subject to the fiduciary standard, meaning they must put your best interest first.
As Liz Davidson, founder of Financial Finesse and author of "What Your Financial Advisor Isn't Telling You," says:
Instead of investment advisers recommending an investment that is suitable for you, meaning it's not unsuitable — it's not something egregious or wildly inappropriate — the financial planner you have, as it relates to your retirement plan accounts, will have to recommend what's in your best interest. That standard is much tighter than the suitability standard.
This means that if there are comparable investments to choose from, advisers will be focusing more on lower-fee funds. The DOL estimates that this could save investors up to $40 billion in fees over the next 10 years.You shouldn't expect immediate changes
The rule will be phased in over time in order to give financial institutions time to adjust and alter their business models accordingly, Davidson says. The full requirements will go into effect January 1, 2018.It can't guarantee perfect financial advice
As NPR's Chris Arnold reported, the proposed rule is over 100 pages long, which meansloopholes could wind up in the final version.
Business Insider's Elena Holodny writes:
According to WealthManagement.com's Diana Britton and David Armstrong, the DOL "tweaked the final version to 'minimize' the compliance burden on firms and throw open the window to allow for a broader range of investments, including non-traded REITs and variable annuities, as long as advisers guarantee they are putting their client's interests ahead of their own."
That being said, the basic premise of the rule is pro-investor.You still have to verify that your financial adviser is bound to the fiduciary standard in regards to other investments
The new rule means that advisers must put your interests ahead of their own when it comes to overseeing retirement accounts, which include 401(k) plans, individual retirement accounts (IRAs), and other tax-deferred accounts, such as health-savings accounts.
When it comes to other financial advice, if you're paying a professional, you'll want to make sure you're dealing with a fiduciary. As Chris Carosa, chief contributing editor toFiduciaryNews.com, tells Business Insider, it can be difficult to tell, since more advisers are dually registered as brokers — subject to only the suitability standard — and fiduciaries. Dually registered advisers can switch roles, thereby blurring the broker-fiduciary line.
"Identify whether your service provider is dual registered — a broker and an adviser — or just an SEC registered investment adviser," Carosa says. "Work with just the SEC registered adviser."
You can also look at the DOL's guide for consumers on how to tell if your adviser is working in your best interest.The price of financial advice could change
Raising investment-advice standards will be a costly process for financial institutions. Opponents of the rule are quick to point out that this will increase the price of financial advice.
Business Insider's Elena Holodny reports:
House Speaker Paul Ryan slammed the rule in his official blog back in March, arguing that the rule would disproportionately hurt low-income people.
The rule "creates more paperwork and costly record-keeping requirements for financial planners, restricting access to quality investment advice for upwards of 7 million Americans with IRAs," he wrote in the post about the previously proposed version of the rule. And it "results in higher costs for people seeking financial advice, disproportionately hurting families with smaller bank accounts."
But Davidson points out that "most lower income Americans are not candidates for financial advice the way the system works now because they don't have enough money."
In fact, she says, the rule could be a great thing for lower- and middle-class Americans, who can instead turn to the lower-cost services that continue to emerge while benefiting from the effect of fiduciary standards.
Davidson says:
The financial services industry is moving towards different, lower-cost means — there's more financial education in the workplace, there are robo-advisers available, and non-profits are gearing towards helping people become their own financial planners. Lower and middle income families are going to have access to these low-cost services that are more holistic.

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The Obama Administration Is Finally Making Retirement-Savings Advisers Put Clients First

Apr 6, 2016 | Slate

By Helaine Olen

Saving for retirement might just get a bit easier for millions of Americans in the coming years, and for once, we don’t need to do a thing. This time, it’s our financial advisers who are being held to account.
On Wednesday, the Obama administration released the final version of new rules for professionals giving financial advice. It’s the culmination of a multiyear battle with the financial services industry, which argued that a higher standard of care would prove so costly it could be forced to dump lower- and middle-income savers en masse.
Under the new regs, financial advisers giving recommendations on retirement investments will have to offer advice that’s strictly in the best interests of their clients, something known as the fiduciary rule. Remarkably, as I’ve written many times, this is not the current standard. Instead, many financial advisers currently need to adhere to something called the suitability standard. That allows them to make suggestions for retirement investments that take into account how clients’ investments buttress their own bottom line. The advice just couldn’t be out-and-out malfeasant.
The Obama administration determined that this sort of advice was costing retirement savers up to $17 billion annually and decided to do something about it. The effort appeared to be languishing until early last year, when Sen. Elizabeth Warren took an interest in the subject. She ramped up the pressure by publicizing how, for instance,financial advisers in the insurance industry were rewarded with vacations at four-star Caribbean resorts in return for selling investors on particular annuities and other insurance offerings.
Under the current regulations, professionals giving retirement advice and working to the suitability standard don’t need to disclose these sorts of conflicts of interest to the savers they’re counseling. That’s going to change—and the financial services industry isn’t wrong when it says it will need to do more to ensure it’s meeting the enhanced standards. There will, for instance, be more paperwork. If the method of payment seems to suggest there could be a potential conflict of interest (like, say, a commission) between the adviser and the consumer, the adviser will need to sign a contract promising to put the consumer’s needs ahead of his or her own.
But doing more isn’t impossible. It seems highly unlikely that the changes put forth by the Department of Labor will force financial advisers to drop many of their customers, though it’s indeed quite possible they won’t earn as much money off of them. It’s almost certainly going to push advisers to recommend that retirement savers put their money in low-fee investments like index funds and make it harder for them to suggest complicated higher-cost options like variable annuities that just happen to be more lucrative for the advice-giver. That benefits the individual investor.
On the other hand, the final version of the new rules includes some changes from previous versions of the proposal—for example, it makes clear that commissions are still a permissible form of payment to advisers, something the industry was actively concerned about, and that retirement education in the workplace is not considered a covered activity. In addition, the fans of finance gurus on radio and TV can rest easy. The new rules make it clear that Dave Ramsey, Jim Cramer, Suze Orman, and other providers of financial infotainment aren’t in a one-to-one relationship with their fans, and can continue to offer up their opinions without fear of the feds knocking on their door.
The revised regulations won’t fully go into effect until 2018. While both Hillary Clinton and Bernie Sanders have said in the past that they support the Labor Department’s current initiative, the same is unlikely to be true of the eventual Republican nominee for president—last week, for example, House Speaker Paul Ryan tweeted out his opposition to the changes, calling them “Obamacare for financial planning.” It seems almost certain there will be some sort of legal challenge to the new regulations, as well.
Moreover, these changes only impact retirement savings. Money that investors hold in regular investment accounts fall under the purview of the Securities and Exchange Commission. As I wrote last week, they aren’t doing much on this front at all.
One other thing: The enhanced standard can’t fix our overarching retirement savings problem. We’re still not saving enough money for our post-work lives. The retirement crisis continues. The median working-age family continues to hold only $5,000 in its retirement accounts. Better advice won’t fix that problem. We need a better safety net, beginning with enhanced Social Security benefits, and a stronger economy, so people can save more, to accomplish that.

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DOL Releases Bold New Retirement Investment Protections

Apr 6, 2016 | The American Prospect

By Justin Miller

Flanked by Democratic allies in Congress on Wednesday, Secretary of Labor Tom Perez unveiled the final version of the long-awaited fiduciary rule, which requires that, like doctors and lawyers, retirement account brokers must act in their clients’ best interest.
“It really puts in place a fundamental principle of consumer protection into the American retirement marketplace, which is that consumers’ best interests must now come before the advisor’s financial interest,” Secretary Perez declared in a speech at the liberal think tank Center for American Progress.
Advocates of the fiduciary rule argue that the retirement investment industry has become tainted by advisors who are incentivized by lucrative fees, commissions, and other monetary rewards to steer clients into inferior retirement investment packages with higher fees and lower returns.
Those types of high fees, one study found, could tack on an additional three years before a worker could retire. Conflicted advice from retirement advisors, advocates say, has cost retirement savers $17 billion per year, sometimes shaving tens of thousands of dollars from an individual’s retirement savings.
The fiduciary rule attempts to address a new reality brought about by the large-scale shift from employer-provided pensions to products like IRAs and 401(k) accounts. It’s a shift that has left many workers—disproportionately blacks, Latinos, and women—in the lurch with no end in sight.
“The regulatory structure that protects people’s investments has not kept up with the changing landscape,” Perez said. “In a world where people are more on their own in making financial decisions, financial advisors are not required to give advice that is not in their clients’ best interest.”
The new rule is a major plank in President Obama’s consumer protection agenda, which was initially spurred by the creation of the Consumer Financial Protection Bureau. Obama called for the Department of Labor to issue the fiduciary rule just over a year ago, saying, “If your business model rests on taking advantage, bilking hardworking Americans out of their retirement money, then you shouldn’t be in business.”
But like many of Obama’s initiatives that rely on his executive power, the rule has faced fierce opposition from Republicans in Congress and the financial services lobby.
Retirement advising companies complained that compliance with the rule would cost the financial services industry lots of money and ultimately limit access to advising services among workers with smaller retirement portfolios. But Secretary Perez said that the Labor Department implemented several changes to initial language that addressed industry concerns, including a last-minute change that stretches out the implementation period.
Critics have also implied that the rule addresses a problem that doesn’t exist, pushing the administration to provide examples of those who have been hurt by bad retirement advice. Admittedly, the Department of Labor has struggled to do so, highlighting just a couple of individual anecdotes in a Politico story. Retirement experts say that it’s hard for consumers to know when they’re being cheated, especially since a lot of unscrupulous behavior in the industry isn’t technically illegal.
Democrats are calling it a landmark achievement for the administration, and have pledged to fight tooth-and-nail against Republican pledges to overturn the rule in Congress.
“Sometimes government works for the people, and today is one of those days,” Massachusetts Senator Elizabeth Warren proclaimed at the event.
For years, wealthy industry players financed an army of lobbyists and lawyers to try to stop this rule in its tracks, Warren said. “And honestly, some of them will continue to keep fighting. They have 17 billion reasons to keep fighting.”

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Financial industry reaction mixed on White House investment advising rule

Apr 6, 2016 | Cleveland.com

By Stephen Koff

WASHINGTON -- The investment industry is reacting with mixed signals to today's White House announcement that advisers and brokers who recommend stocks, bonds, mutual funds, annuities and other instruments for retirement saving must act in the client's best interest.
Industry groups cited concerns about compliance and a possible unintended consequence: People with the smallest retirement accounts could wind up with fewer places to go for financial advice.
It's not that they want to rip off people who entrust them to give advice on their individual retirement or 401(k) accounts, industry leaders said. It's that the steps needed to prove compliance -- to show clients that they aren't pushing an investment in order to enrich themselves with bigger commissions or fees -- could be cumbersome, and not worth taking for small clients.
Yet analysts looking at how the so-called fiduciary rule might affect Wall Street said any damage to the industry might be limited. They noted that the Department of Labor pulled back some proposed provisions that would have been more difficult for financial advisers to meet.
Here's what it's all about.
The reason:
At issue is a long-awaited rule issued today by the U.S. Department of Labor. Aimed at helping people who put away money for retirement in IRAs and 401(k) plans, it says that financial advisers must put the client's interest first. The rule is intended to stop advisers, brokers and others from selling financial products that earn high commissions or fees when other choices would be in the client's interest.
What the White House did, and why
The so-called fiduciary rule will require retirement advisers, including those running IRA and 401(k) funds, to act in the best interest of the client.
The rule applies to investments in several kinds of retirement accounts but is aimed in particular at halting abuses when workers retire and seek advice on what to do with money they plan to roll over from a workplace-based 401(k) account to their own IRA. The rule does not require that an adviser always recommend investments with the lowest fees, Labor Secretary Thomas Perez said. Higher-fee products might be fine, if they are what the client truly needs, as opposed to what the broker needs to pay for his next vacation.
"The Yugo may be the lowest-priced car, but it ain't a very good car," Perez said.
The cautious or critical
Challenges are possible, from Republicans in Congress or an industry lawsuit against the Department of Labor. Some influential conservatives are pushing back against the rule already.Grover Norquist, president of Americans for Tax Reform, said on Twitter that the rule was "designed to damage" accounts created by "independent Americans who control their own retirement."House of Representatives Speaker Paul Ryan, a Wisconsin Republican, issued a statement that did not say directly that he would encourage legislation to kill the rule before it takes effect. But he said that "we will continue to look at every avenue to protect middle-class families and small businesses from government overreach."
Tim Pawlenty, a former Minnesota governor who now heads the Financial Services Roundtable, said in a statement, "Policymakers should do everything they can to help Americans be more prepared for retirement, not create miles of red tape that makes saving for retirement even more difficult." His group advocates for the financial services industry. The Financial Services Institute, which represents independent financial advisers, said it wants to review the full rule in detail but questions the need for new regulation and worries it could hamper access to "affordable, objective financial advice." President and CEO Dale Brown said that there is "no compelling evidence this rule is necessary."
Those pleased with the compromises
Before the rule was finalized, the Department of Labor dropped earlier proposed provisions that could have hampered a company selling its own line of mutual funds or other products. As long as there is disclosure and the products truly are in the client's best interest, that should be fine, White House officials said.
The department also pulled back on some paperwork requirements, lessened the extent of financial projections an adviser must provide to an IRA client and extended the time for compliance. It made it possible for an adviser to have a preliminary discussion without scaring a client off by whipping out a mandatory fiduciary contract. And it allowed for an exemption of advisers to small businesses and their employees if the company's 401(k) plan has less than $50 million invested.
Wall Street seemed impressed with these changes. According to a Wall Street Journal roundup of industry reactions:Morgan Stanley concluded that the rule was "meaningfully softened in several aspects" from the original proposal, and that is "good news for those companies impacted by the rules."RBC Capital Markets issued a research note saying the threshold for 401(k) plans was a positive.While annuity companies including Lincoln, MetLife and Prudential "would still see a negative hit to variable annuity sales," it won't be as bad as in an earlier draft of the rule, RBC Capital Markets said.Merrill Lynch expressed satisfaction that Perez "worked to address many of the practical concerns raised during the comment period," the Journal reported.
Those pleased in general
At least one large financial firm with a significant retirement-account footprint, TIAA, today applauded the rule, although it said it wanted to study it further. The company pointed out how the Department of Labor reduced paperwork requirements it had proposed in an earlier version.
"Putting the customer first is a core TIAA value, and we believe adhering to a best-interest standard under the Department's new regulation is an important way to help more people build financial well-being," said a statement from Roger W. Ferguson Jr., president and CEO.
Ranking Democrats in Congress also expressed pleasure, with House Democratic leader Nancy Pelosi of California saying the rule will "enhance the security of hard-working Americans."
Ohio U.S. Sen. Sherrod Brown, a Democrat, had a similar reaction. The office of his Ohio colleague, Sen. Rob Portman, a Republican, said Portman was still studying the rule.
In a series of tweets, Sen. Elizabeth Warren, a critic of the industry's practices, made clear why she applauded the rule. Doctors and lawyers have had conflict-of-interest rules, she said, but not retirement advisers. "It's nuts!" she said.

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What The New 'Fiduciary Rule' Means For Investors

Apr 6, 2016 | Benzinga

By Brian Dolan

The US Dept. of Labor has issued new rules governing conflicts of interest in financial advice from brokers managing retirement accounts. The new rules require US securities brokers to adhere to a ‘fiduciary rule,’ which means that investment advisors must put their clients’ interests first. You may be asking yourself, “Didn’t brokers always have that obligation?” The answer would be no, they didn’t.
The new rule is aimed at clearing up that very basic relationship between brokers and their clients. In the past, brokers could place clients in more expensive investment options even if it resulted in lower returns for the customer, as long as the investment was suitable.
The government estimates the prior arrangement cost investors around $17 billion per year in reduced returns. The new rule is not set to take effect until January 2018, but some brokerage firms have already indicated they will not be able to service investors with smaller account balances.
Do You Know How Much You’re Paying For Your Investments?
If you didn’t know that your broker had a potential conflict of interest, you aren’t alone. Investing expenses are frequently overlooked by investors, who tend to focus more on historical returns. But investing expenses can have a significant impact on your returns, especially over the long term.
More importantly, investing expenses are one of the few variables affecting returns that you can actually control. You can’t control what happens to the economy, a particular company, or what markets will do. But you can control how much you spend to invest, depending on which investments you choose and where you get them.
Compare mutual funds to ETFs, for example. Most mutual funds are ‘actively’ managed, with an average management fee of 1.33% per year, according to Morningstar, an investment research firm. ETFs are mostly ‘passively’ managed index funds with management fees of around 0.1% per year, also according to Morningstar.
That 1.23% difference in management fees might not seem like much at first glance. But over a long-term investment, say 40 years, it could eat up nearly 30% of your investment in reduced returns. That’s because not only are you paying out fees every year, but also your investment is not compounding on the fees paid out.
What’s An Investor To Do?
There’s typically always some fee associated with investing, whether it’s commissions on single stock/ETF transactions or management expenses with a mutual fund. The key is to identify what expenses you’re being charged and what you get, or don’t get, in return. With ETFs, you’ll pay commissions and the ETF management fee. With mutual funds, you’ll pay the management fee, 12b-1 fees, and any ‘load’ fees. More likely than not, you’ll see that low-cost ETFs and index funds are the way to go for long-term investing. You’ll pay the lowest fees and closely match the overall return of the market you’ve invested in.
And as an individual investor, you have the option of assembling your own diversified portfolio to reflect your investing ideas and goals. You don’t need to wait for the mutual fund industry to see the light in 2018.

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