The Atlanta Journal-Constitution
Retirement advice gets tougher rules
Some see double-edged sword in huge change for financial world.
With millions of baby boomers on retirement’s doorstep, new federal rules will put more pressure on brokers, insurance agents and other financial advisers to pitch investments that are in their clients’ best interests.
President Barack Obama championed the tougher so-called “fiduciary” requirement — one of the biggest changes to hit the financial world in generations — to help save millions of investors from costly fees, improve retirement prospects and stem abuses that have claimed life savings in some cases.
In essence, it requires retirement advisers to suggest investments that are best for clients’ circumstances and pocketbooks, regardless of what fees or commissions the adviser might miss out on.
Currently, such advisers must meet a looser requirement that their guidance be “suitable.”
By some estimates, the result could be up to $700 billion in retirement funds moving to lower-cost accounts such as index mutual funds or exchange-traded funds, or ETFs.
But some worry it will also mean watered-down advice and fewer options for those with small retirement nest eggs. Some companies, such as Atlanta-based Invesco and Primerica, may have to overhaul how they sell some investments.
“I think it’s a double-edged sword,” said Howard Johnson, a 64-year-old Ellenwood retiree and advocate for do-it-yourself investing through grass roots investment clubs.
People are “going to get better advice,” he said, but the new rule could also raise investment advisers’ costs and cause them to reject clients with fewer dol-
lars to invest.
“It may discourage people from investing,” he worried.
The change starts taking effect a year from now but is already roiling the industry. It applies to brokers, agents and consultants who offer advice and products for retirement accounts such as IRAs, 401(k)s, annuities and lump sum pay-outs from pensions.
Professional advice about non-retirement investments, including regular brokerage accounts, isn’t affected.
Steering investments
Critics say the current standard has allowed unscrupulous advisers to steer retirement savings or pension lump sums into overly risky products that pay high commissions, even though it might have been wiser and cheaper to leave their savings with the old employer.
“I think it’s about time. A client’s benefits should be a priority over advisers,” said Mitch Reiner, of Capital Investment Advisors in Sandy Springs.
He expects many brokers to shift away from commission-based products and put more of their clients in accounts that charge fees to manage their money — typically 1 percent annually.
That will reduce potential conflicts of interest, said Reiner, but it likely also means more firms will require managed-account customers to have bigger retirement nest eggs.
“The people who are going to be affected by this are people with lower balances,” said Reiner. His firm, like other money managers regulated by the U.S. Securities and Exchange Commission, already has to meet similar clients-come-first rules.
The U.S. Department of Labor rolled out its rule as an update to regulations dating back to the 1970s, when most employers offered traditional pensions and 401(k) s didn’t even exist.
Some industry players complain that the new investor protections don’t go far enough.
“People who give this advice have the ability to destroy somebody’s financial future with self-serving advice,” said Robert Port, an Atlanta lawyer with Gaslowitz Frankel who represents people in disputes with investment advisers. “I wish it covered the financial industry as a whole, and not just the retirement accounts.”
It might have saved one retiree that he represented tens of thousands of dollars in unnecessary commissions and tax bills, he said.
In that case, he said, an insurance agent persuaded the retiree to take his pension as a lump sum. Then, in a deal that triggered “a pile of taxes,” said Port, the agent sold the retiree an annuity that locked up his money. The agent walked away with a 10 percent commission.
“If someone had given (the retiree) straight advice, it would have been to leave the pension alone,” said Port.
Many worried
The new rule worries many broker-dealers, insurance firms and some mutual fund companies that rely on armies of commission-paid sales agents.
They complain they’ll have to retool how they sell some products and spend more money on training and complying with the new rules. They’ll no longer be able to cater to smaller investors, some say.
Terry Weiss, an Atlanta lawyer with Greenberg Traurig who represents the investment industry, expects firms to face more costs.
“I think it is going to increase regulatory and enforcement actions and possibly add to the litigation case load as well,” he said.
The new rule is so broad that “nearly every conversation a financial professional has with a potential retirement saver will be construed as fiduciary advice,” Karen Sukin, a lawyer for Duluth-based Primerica, said in written comments objecting to the federal Department of Labor’s proposed rule.
Primerica has roughly 107,000 licensed agents selling mutual funds, annuities, insurance and other products on commission. The company declined to comment for this story.
Primerica’s shares slumped more than 20 percent since the end of 2014 amid speculation that tough rules would crimp its business, though they have rallied somewhat since details were released this month.
Invesco, an Atlanta-based mutual fund company that sells many of its funds and other products through independent brokers and insurance agents, also was unhappy with parts of the rule.
It’s too complex and “casts too broad a net” on who it covers, Invesco complained to the Labor Department. The mutual fund company also feared that the agency would limit payments it could make to sales agents, and that the rule would “inappropriately favor certain types of investment strategies ... over others.”
Invesco also didn’t comment for this story.
Firms that offer low-cost index funds and ETFs, such as Vanguard and Black Rock, will likely benefit. Other beneficiaries could be robo-advisers such as Wealthfront. com that use automated money management software to handle smaller accounts at a lower cost than human money managers.
Reiner, the Sandy Springs money manager, hopes a low-balance investment management service that his firm launched several years ago will benefit from the new rule.
Capital Investment Advisors’ clients typically have about $1 million in their accounts. But the company created a second unit, GetWela.com, aimed at investors with accounts as low as $10,000.
Clients talk to their advisers via Skype, and the firm lowers labor costs by combining the parent company’s investment decisions with low-cost exchange-traded funds and an online portal.
“Wela is going to benefit tremendously from this,” Reiner said.