New financial rules shift industry
The nation’s financial advisors are training — or retiring — as new , stricter rules adopted in 2016 are set to take effect in April.
PITTSBURGH — As head of the largest independently owned financial advising firm in the Pittsburgh region, managing billions of dollars in clients’ money, Kimberly Fleming is feeling the weight of responsibility to get her staff trained on procedures to meet sweeping rules the federal government plans to impose in April.
“This has felt like my life. It’s so important to me. I want us to deal with it constructively,” said Fleming, chairman of the HefrenTillotson financial planning firm.
The new regulations handed down in April 2016 by the U.S. Department of Labor are designed to tackle the problem of conflicted advice in the financial services industry.
By April 10, all advisers working with clients’ retirement accounts are expected to act under a stricter “fiduciary” standard, where previously they had a choice of acting under a less rigorous “suitability” standard when offering advice on IRAs, 401(k)s and 403(b)s.
The government’s goal is to create uniformity so that there will no longer be two different groups of financial advisers working under two different standards.
Advisers working under the suitability standard are only required to recommend investments that are suitable for clients. That doesn’t always mean the advice is bad but it opens the door to a number of abuses, such as unnecessary high commissions and fees for investment products and advice.
The White House Council of Economic Advisers estimates $17 billion is drained out of retirement accounts each year due to conflicts of interest by investment advisers who sell commissioned products to their clients.
The fiduciary standard requires advisers to act solely in the client’s best interest when offering financial advice.
Advisers at Hefren-Tillotson have operated under both standards, letting the client choose how to work with advisers. Fleming would not say what percentage of her firm’s business is generated by commissioned sales versus fee-based financial advice, but with $11 billion in client assets under management, even 10 percent would be a sizable amount.
“We’ve operated under suitability, or what we think is in the best interest for (clients), but in a flexible way,” said Fleming. “This really narrows the choices that clients have and how they work with advisers.
“(The new rule) has really turned over the whole industry in ways,” she said. “Some are good and some are not. I would say we’ve always felt like fiduciaries. We do comprehensive planning and we really understand our clients.”
Months out from the fiduciary rule going into effect, many advisers and firms across the country are struggling to understand the full scope of how the rules will affect their business.
But the impact is already being felt.
Merrill Lynch recently announced it will no longer sell commissioned products in retirement accounts. Some smaller firms hope to survive by merging with larger ones to afford the high cost of implementing changes. Others are getting rid of divisions within their business that are driven by commissioned sales. Some advisers who make a living selling commissioned products are exiting the business altogether.
According to Limra, a worldwide association of insurance and financial services companies based in Windsor, Conn., 54 percent of broker-dealers surveyed late last year believe some of their advisers will retire rather than adapt to the fiduciary rule.
“Because the rule increases advisers’ liability, brokerdealers also expect their advisers to stop providing advice to clients with lower IRA account balances,” said Kathy Krozel, research director for Limra Distribution Research. “At a time when more Americans need access to advice, it appears that the new DOL rule may actually reduce access for middle income consumers.”
Meanwhile, many investment firms are hoping President Donald Trump’s administration will either kill or replace the fiduciary rule based on his general intention to drastically reduce government regulation.
“Until something changes, everyone’s working assumption is the rule will be implemented in April, said Tim Kober, chairman of the National Association of Personal Financial Advisors in Chicago.
“The big takeaway is, regardless of what happens with the rule based on the political environment, consumers now have an increasing awareness of the two types of standards,” Kober said. “That, for us, is the bottom line. That is why we have a conviction that regardless of the regulatory path, consumers will demand advice delivered under a fiduciary standard of care."