Power

Labor Department Rules Target Bad Investment Advice

A series of proposed regulations seek to address conflicts of interests in retirement advice the Obama administration says costs middle class and working families billions of dollars each year.

A series of proposed regulations seek to address conflicts of interests in retirement advice the Obama administration says costs middle class and working families billions of dollars each year. Shutterstock

The Department of Labor on Tuesday announced a series of proposed rules designed to protect consumers against conflicts of interest in retirement advice from financial advisers that White House advisers claim cost middle class and working families billions each year.

The proposal targets business practices of retirement account advisers and brokers who, under current law, can recommend retirement investments and products that make those brokers more money then they do their client, often in the form of hidden fees passed on to employee-investors in the fine print of their retirement plans.

A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about $17 billion per year in total.

The Obama administration’s proposal would expand the number of people who are subject to fiduciary best interest standards when they provide retirement investment advice. The proposal would include a package of proposed exemptions that allows advisers to continue to receive payments that could create conflicts of interest if the conditions of the exemption are met.

Under the Labor Department’s proposal, those brokers who wish to receive payments from companies selling products they then recommend to their employee-investors will need to rely on one of several proposed “prohibited transaction exemptions” set forth by the federal government.

The proposed “best interest contract exemption” would be available to advisers who make investment recommendations to individual plan participants, IRA investors and small plans, which according to the Labor Department are most at risk from conflict-of-interest losses.

“This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest,” Secretary of Labor Thomas E. Perez said in a statement. “As commonsense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace.”

“Our proposed rule would change that,” Perez continued. “Under the proposed rule, retirement advisers can be paid in various ways, as long as they are willing to put their customers’ best interest first.”

The proposals require retirement investment advisers and their firms to formally acknowledge their fiduciary status and enter into a contract with their customers in which they commit to fundamental standards of impartial conduct.

These include giving advice that is in the customer’s best interest and making truthful statements about investments and their compensation. If fiduciary advisers and their firms enter into and comply with this type of contract, clearly explain investment fees and costs, have appropriate policies and procedures to mitigate the harmful effects of conflicts of interest, and retain data on their performance, they can receive common types of fees that fiduciary advisers could otherwise not receive under the law. These include commissions and revenue sharing. If they do not, the proposals state brokers must refrain from recommending investments for which they receive conflicted compensation.

The federal government proposal includes other new exemptions and updates some exemptions available for investment advice.

Conservatives came out strongly against the proposed fiduciary rules, describing them as an assault on Americans’ fundamental freedoms.

“The new Department of Labor fiduciary rule, which Obama officials have said will mandate that brokers and others only give investment guidance that serves savers’ ‘best interest,’ will likely resemble Obamacare for your IRA and 401(k),” said John Berlau, senior fellow at the conservative Competitive Enterprise Institute. “Just as patients should be able to choose doctors, savers should have the freedom to weigh the potential risk and return of various investment plans. But imposing ‘fiduciary’ liability on a broad swath of financial professionals who don’t provide regular investment advice, as this new rule may do, would threaten this fundamental freedom of savers and investors.”

Now that the Labor Department’s proposed rule has been released, it will take public comment before issuing its final regulation.