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WASHINGTON—Brokers who
recommend retirement-account investments would have to put their
clients’ interests ahead of personal gain under rules expected to be
endorsed by the Obama administration as soon as next week.
At present,
the brokers’ recommendations for 401(k) plans and other retirement
accounts generally have to be “suitable,” a weaker standard that critics
say permits high fees that eat into investors’ returns.
A
White House announcement of the so-called fiduciary rules is expected
to generate significant pushback from Wall Street, which says it already
faces robust regulation and warns the rules’ likely costs could make it
uneconomical for brokers to serve lower-balance accounts. It likely
would take several additional months for the Labor Department, which is
drafting the rules, to collect public feedback before it can move to
implement the rules.
The
administration is concerned investors aren’t aware that brokers benefit
financially by selling products that may not be in a client’s best
interest but still rise to the lower standard of being suitable
investments.
“The current
regulatory environment creates perverse incentives that ultimately cost
savers billions of dollars a year,” Jason Furman, chairman of the White
House Council of Economic Advisers and CEA member Betsey Stevenson,
wrote in an internal memo last month.
The
White House memo argues that investors lose as much as $17 billion
annually in retirement dollars—or “at least” 5% to 10% of their
retirement savings over 30 years—because of “excessive fees” and
“conflicted” advice—amounts disputed by the industry.
“We
think the data and studies are less than conclusive and in many cases
dated,” said Kenneth Bentsen, president and chief executive of the
Securities Industry and Financial Markets Association. “It’s designed to
cast aspersions on the broker model,” he added.
The
potential for so-called fiduciary rules has triggered debate over the
past five years, pitting brokerage firms against investor advocates over
the way in which retirement accounts are sold to investors.
The
standards, if finalized, could end up cutting into payments brokers and
others collect from mutual-fund and insurance companies when they sell
plans to retiree clients. Brokers have pushed back against stricter
rules, warning they will drive up costs and reduce retirement choices.
The
rules are expected to be more flexible than a 2010 proposal the Labor
Department withdrew amid an outcry from Wall Street, which complained it
would have barred many routine payments to brokers, including
commissions.
They won’t bar
commissions for those who sell retirement investments but would ensure
brokers and other financial professionals have an overriding
responsibility to keep their clients’ best interests when giving
financial advice.
The
proposal is expected to address what critics view as loopholes in
existing law that allow brokers to skirt a fiduciary duty, such as when
they only provide one-time, as opposed to ongoing, advice or by saying
their recommendations weren’t the basis of an investor’s decision to buy
an investment product. The proposal is also expected to tighten
fiduciary rules to advice provided to individuals looking to roll over
401(k)s into individual retirement accounts when they leave a job or
retire.
Industry groups and
some lawmakers have urged the Labor Department to wait until the
Securities and Exchange Commission decides on its own definition of a
fiduciary standard for investment advisers and brokers working with
mom-and-pop retail investors. The SEC, under the 2010 Dodd-Frank law,
gained authority to write such standards but isn’t required to do so.
The agency’s efforts apply broadly to advice about securities like
stocks and mutual funds but not to workplace retirement plans.
The
SEC has consulted with the Labor Department on the rules, and SEC
Chairman Mary Jo White and Labor Secretary Tom Perez have met at least
twice to discuss the department’s proposal, according to people familiar
with the matter.
Labor
Department officials declined to spell out details of the proposal. But
the measure is expected to soon advance to the White House Office of
Management and Budget for review, after which it would be subject to
public comment.
Culled from Wall Street Journal
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