When it comes to re­tire­ment in­vest­ments, ad­vis­ers now must put clients’ in­ter­ests first

▶ When it comes to re­tire­ment ac­counts, the client comes first ▶ Ad­vis­ers have to “start jus­ti­fy­ing the fees that they charge”

Bloomberg Businessweek (North America) - - Contents - Kather­ine Chiglin­sky, Mar­garet Collins, Robert Sch­midt, and Ben Stev­er­man

How much jar­gon should a per­son have to master to save for re­tire­ment? Con­sider the word “fidu­ciary.” Ac­cord­ing to a sur­vey paid for by re­tire­ment ad­viser Fi­nan­cial En­gines, only 18 per­cent of adults were sure they knew what it meant in the con­text of in­vest­ment ad­vice. A fidu­ciary is some­one who legally must put the client’s in­ter­est be­fore his or her own. Only some fi­nan­cial ad­vis­ers, such as reg­is­tered in­vest­ment ad­vis­ers, are fidu­cia­ries. The oth­ers have to en­sure only that an in­vest­ment is suit­able—no risky tech funds for an in­vestor seek­ing safety—but they can rec­om­mend an op­tion that pays a bet­ter com­mis­sion.

Ian Macgre­gor, a con­sul­tant in Dublin, Ohio, wasn’t al­ways aware of the dif­fer­ence. He says his bro­ker would present him a choice of mu­tual funds but tended to push ones with up­front fees as high as 5 per­cent. He’s since switched ad­vis­ers. “There’s got to be some way to pro­tect the less savvy in­vestor from be­ing taken for a ride,” he says.

On April 6, the U.S. De­part­ment of La­bor un­veiled a rule change, more than six years in the mak­ing, to hold more ad­vis­ers to the tougher clientscom­e-first stan­dard. Us­ing its power to

reg­u­late re­tire­ment and pen­sion plans, the de­part­ment will de­fine as fidu­cia­ries peo­ple and com­pa­nies giv­ing ad­vice on 401(k) and sim­i­lar plans as well as in­di­vid­ual re­tire­ment ac­counts. That’s a $14 tril­lion pile of as­sets. The reg­u­la­tion will still al­low bro­kers to col­lect com­mis­sions, but they’ll have to dis­close con­flicts of in­ter­est. Strength­en­ing cus­tomers’ abil­ity to sue, the rule also adds teeth to en­force­ment.

The rule was sup­ported by Pres­i­dent Obama. The ad­min­is­tra­tion pro­duced a study show­ing that bad ad­vice costs re­tirees a col­lec­tive $17 bil­lion an­nu­ally. In­sur­ers, bro­ker­age firms, and fund com­pa­nies bit­terly op­posed draft ver­sions of the rule, say­ing it will make it too costly to ad­vise peo­ple with small ac­counts.

The stan­dard will “force fi­nan­cial ad­vis­ers to change how they speak to their clients and start jus­ti­fy­ing the fees that they charge,” said Michael Wong, an equity an­a­lyst at Morn­ingstar, be­fore the fi­nal rules came out.

Com­pa­nies such as Van­guard Group and Black­rock that pro­vide low-cost in­dex and ex­change-traded funds will likely ben­e­fit from the rule, Wong said, be­cause it forces ad­vis­ers to jus­tify higher-cost rec­om­men­da­tions. In­sur­ance com­pa­nies that sell re­tire­ment prod­ucts may suf­fer, be­cause they of­ten rely on a com­mis­sion-based sales force. The Amer­i­can Coun­cil of Life In­sur­ers has called the ini­tia­tive “gov­ern­ment at its worst.”

Some com­pa­nies are al­ready ad­just­ing. Lin­coln Na­tional has been shift­ing its sales fo­cus away from in­vest­ments called vari­able an­nu­ities with liv­ing ben­e­fits. Metlife Chief Ex­ec­u­tive Of­fi­cer Steve Kan­dar­ian says the prospect of new rules “had an im­pact” on his de­ci­sion to sep­a­rate the com­pany’s U.S. re­tail unit. Last year he likened the pro­posal to re­quir­ing a Chevy dealer to rec­om­mend a Ford if it’s a bet­ter fit for the cus­tomer.

The rules take full ef­fect in 2018, but they’re likely to face chal­lenges in both the courts and Congress.

The bot­tom line New stan­dards for the $14 tril­lion re­tire­ment mar­ket could re­shape how in­vestors get ad­vice.

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