New guidelines, better advice?

legislationMost people think that the Securities and Exchange Commission (SEC) regulates the investment markets and providers of investment advice, and that the Financial Industry Regulatory Authority (FINRA) regulates the Wall Street sales agents.

But in fact, when it comes to your retirement plan, like a 401(k) account, the chief regulator is actually the United States Department of Labor.  Anybody who provides advice to these plans has to meet standards generally defined in the 1975 law known as ERISA (Employee Retirement Income Security Act), which is administered by the Department of Labor.

The list of retirement plan advisors is a long one.  There are independent financial advisors who receive fees directly for their work, and act in the best interests of the plan participants.  But many plans have been sold by insurance agents and brokers, who creatively introduce a growing array of hidden charges and fees and high-cost investments which, according to analysis by the White House Council of Economic Advisors, together have been quietly shifting roughly $17 billion a year out of the pockets of American workers into Wall Street bonus pools and insurance company coffers.

This month, the Department of Labor issued rules designed to stop these brokers and agents from working in their own interests rather than the interests of American workers.  The rule imposes iron-clad fiduciary requirements on anyone who provides investment advice to these plans or plan participants.  “Fiduciary” is a legal term that is grounded in case-law, but essentially it means that the customer’s interests must be the priority when any investment recommendation is made.

In addition, the Department of Labor extended these new, stronger protective rules to anyone who recommends that consumers roll their money out of a retirement plan into an IRA.  Those investment recommendations, too, must also be made in the best interests of the customer.  This was intended to prevent insurance agents and brokers from recommending that their customers move money out of the newly cleaned up plan into the same high-commission products (like variable annuities and non-traded real estate investment trusts) that they had been recommending in the plan.

How well will this new set of rules protect consumers?  At this point, there is reason to be optimistic.  The larger sales organizations on Wall Street and in the insurance industry could be sued under this strict fiduciary standard if their brokers and agents continue their current practices, and they would be unlikely to prevail in court.  The safest course would be for these organizations to set up divisions made up of people who would be trained to recommend only lower-cost or high-performing investment options, meanwhile giving up the sly hidden fees that they have been collecting for decades.

Alas, the rule specifically states that existing arrangements will be grandfathered, which means that if you’re a participant in a plan at your workplace, you may not immediately feel the impact of new fiduciary obligations.  But over time, most companies are expected to take a closer look at their fee structure, and as they amend their plans, the money leaks will gradually be repaired.

Eventually, if the analysis is right and workers suddenly find themselves with, collectively, $17 billion a year more in their retirement accounts than they were getting before, we could see a difference in the number of people who can afford retirement.  The only losers would be Wall Street bonus pools and insurance agent commissions, which, for most observers, actually makes this a win-win.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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