Obama’s proposed IRA regulations could help retirement savers
New rules from the White House could soon impose fiduciary duty on financial advisors to stop rogue investment brokers from bilking their clients.
In late February, President Obama proposed new rules for investment brokers who handle retirement funds or offer financial advice. The rules are touted as tougher regulations on dishonest brokers that will protect people who invest in IRA retirement savings accounts. The new White House-initiated rules could mean more money in the pockets of savers, and less pilfering by the hands of dishonest brokers.
If approved, the rules would block many of the often-unseen ways that brokers can chip away at retirement accounts, such as through hidden fees, higher returns for the broker, or investing in funds that possess innate conflicts of interest between the broker and the seller, which the White House has said costs retirement savers millions, even billions, each year.
In a report released by the Council of Economic Advisors, investors who receive conflicted advice from their broker earn roughly one percentage point lower annually than investors with advisors who act in a fiduciary capacity.
“Financial advisers absolutely deserve fair compensation,” Obama said in recent remarks to the AARP, the nation’s biggest lobby for retirees, which supports the proposed rules. “But they shouldn’t be able to take advantage of their clients.”
Investment brokers buy and sell financial products on behalf of their clients, and often receive a commission for their work. Under current regulations, brokers are allowed to recommend which products their clients buy or sell, so long as they are “suitable” investments based on the client’s existing financial portfolio, age and risk tolerance. Some say that this standard for what is suitable and what is not, however, leaves the door wide open for abuses at the expense of retirement savers.
Although a broker today is forbidden from pitching penny stocks or real estate investment trusts to an 85-year-old woman living on a pension, that doesn’t mean all brokers have to divulge conflicts of interest or reveal information about any hidden fees they receive for the sale. Brokers can nudge clients toward investing in a mutual fund that pays the broker a higher commission without telling the client, for example.
The proposed rules would require brokers handling retirement accounts to act in a fiduciary capacity, meaning they must put their clients’ interests ahead of factors such as their own compensation or company profits when they recommend or sell stocks, bonds, annuities and other investments. The proposal would make them fiduciaries for their clients, so by law they would be considered trustees for their clients and obligated to disclose potential conflicts, fees they receive, or if they, or their firm, receive money from a mutual fund company to promote a product.
According to Bloomberg, the president proposed the rules because current regulations on brokers are decades old and were devised in the era when most Americans could count on a traditional pension from employers. That’s not the case today, and retirement savers increasingly use private retirement accounts, such as IRAs, either as their primary nest egg or to supplement employer-sponsored plans.
While brokers are helpful to savers navigating the confusing options available to them through self-directed retirement accounts, such as IRAs, others are skimming significant sums annually from small investors, Obama said.
To back up their claims, the White House released a 30-page report from its Council of Economic Advisers noting that an estimated $1.7 trillion of individual retirement account assets are invested in products that pay fees or commissions that pose conflicts of interest.
The new rules could change how Americans receive investment advice. The Securities Industry and Financial Markets Association, which is lobbying against the regulations, is concerned that the rules would hurt investors, because brokers would be more limited in the investment options they can propose. They warn that mid- and low-income employees with smaller retirement balances may be especially harmed because the added costs from the regulations will probably prompt brokers to drop client accounts with less than $50,000 of assets, leaving those investors to manage their own savings.
Spokespersons from the White House have said that the new regulations will include specific provisions to assuage those fears. The White House also said the new higher standards would not apply to advisors providing “general education” about employer-sponsored retirement plans and IRAs.
The proposed rules could still be months away from implementation. After an internal review by the White House budget office, the rules will likely be put out for public comment for several months. President Obama can put the rules in place without congressional approval.