By Sheryl Rowling
SAN DIEGO — Stockbrokers and insurance salespeople are upset. Why? Because the Department of Labor just approved new rules for them. The good news is that it’s good for investors. The bad news is that the new rules won’t be enforced for over a year (and the brokerage houses and insurance companies might challenge the rules). Before filling you in on the details, let’s start with the background.
When it comes to investment advice, advisors are separated into two categories: Registered Investment Advisors (RIAs) and “brokers” (anyone who is not an RIA). RIAs are required to act in a fiduciary capacity, meaning that all recommendations must be in the best interest of the investor. Brokers are not required to act in the best interest of their clients; they are held to a “suitability” standard. This means as long as the recommendation is suitable, it doesn’t have to be what the broker believes is best for the investor. Translation: Brokers can recommend investments that pay themselves whopping commissions.
It would be nice if all advisors were held to fiduciary standards, but these new rules are not coming from the SEC, they are coming from the Department of Labor. Thus, nothing is changing for “regular” investment accounts – only retirement accounts.
So, what exactly do the new rules say? Essentially, anyone providing investment advice for IRAs and retirement plans, such as 401(k)s and profit-sharing plans, must put the interests of the investor first and must clearly disclose any conflicts of interest that might prevent the advisor from acting in the investor’s best interest. This means that, once the new rules take effect, brokers can’t sell high-cost investments for your 401(k) or IRA.
For example, when a person changes jobs, there are usually three options: keep the 401(k) money where it is, transfer the 401(k) money to the new employer’s 401(k) or roll the funds into an IRA. Frequently, investment advisors will recommend rolling the old 401(k) to an IRA. An RIA who recommends this will invest the money into the strategy you’ve agreed on, coordinating it with your other investments and will recommend the best funds – which likely won’t pay commissions. A broker who recommends the rollover will be anxious to sell you investments that pay high commissions. (Did you know that commissions can be six percent or more?)
Does this explain why brokers aren’t happy? The fiduciary requirement means that they can’t sell high cost annuities for IRAs. They will no longer be able to recommend high commission funds for your retirement account (unless you are part of a large employer plan where the brokers will still be able to do the hard sell). But, watch out: Brokers can still sell you anything if it will be held in a non-retirement account.
The worst part of these rules is that many investors won’t know the difference because consumers are largely unfamiliar with the difference between an RIA and a broker (or insurance agent or other salesperson). They are all viewed as “investment advisors” in the public eye. Let’s hope that the publicity around these new rules bring about investor awareness of the importance of a fiduciary relationship with their investment advisors.
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com. Comments intended for publication in the space below must be accompanied by the letter writer’s first and last name and by his/ her city and state of residence (city and country for those outside the U.S.)