New York Estate Planning & Elder Law Blog
The White House administration is pushing for legislation that would make it harder for retirement fund brokers to push higher fee mutual funds or other expensive products to people who are trying to save for retirement. The plan, issued by the federal Labor Department, would require brokers to act in the best interests of their clients, which is a change that could drastically affect the earnings of financial advisers in the handling of retirees’ funds.
Old Brokerage Rules
President Obama said that the current regulations regarding brokers are out of date and come from an age where employees could rely upon a pension from their employers. “Financial advisers absolutely deserve fair compensation,” the President said, “But they shouldn’t be able to take advantage of their clients.” Under the current rules, brokers can sell any financial product that they deem “suitable” for an investor, which means that it fits the client’s needs and financial risk.
The opposition has beaten other attempts to curtail brokers’ fees in the past, especially with more banks investing in more capital-intensive trading units. Finance groups say that the White House has distorted the issues and disregarded already tough laws on financial brokers that are enforced by both the Securities and Exchange Commission as well as the Financial Industry Regulatory Authority.
White House Proposed New Rules
This plan would impose a fiduciary duty on the brokers that would “crack down on backdoor payments and hidden fees.” The main gist of the proposal is an effort to tighten the legal standard that brokers have in handling retirement funds, accounts, and 401(k)’s. Currently, American retirees have more than $11 trillion in retirement funds.
The Labor Department plans on sending the proposed new rules to the Office of Budget Management and Review next week, but it could be several more months before the official details are released to the public. However, this will also give interested parties like the securities industry and lawmakers the chance to comment on the new rules before the final regulation is issued.
How a Broker Profits
Under the current rules, a broker earns money from the sales commission of financial products or through fees paid by investors in mutual funds. This incentivizes brokers to push the financial products that net the highest fees and not necessarily the highest gain for retirees. Because of this incentive structure, investors lose as much as $17 billion per year. “The corrosive power of fine print, hidden fees and conflicted advice can eat away like a chronic illness at people’s hard-earned retirement savings.”
The area where investors are most vulnerable to conflicts of interest with the brokers is when they are moving investments from a 401(k) or other employer sponsored account to an IRA. The brokers can steer investors into products that net the brokers higher fees, and the average IRA rollover for investors between the ages of 55 and 64 years old was over $100,000 in 2012.