The Obama
administration on Wednesday unveiled its final version of a retirement advice
rule aimed at ensuring that broker-dealers put their clients' interests ahead
of their own profits, though it was softened in response to industry
complaints.
The rule, requiring
broker-dealers who provide advice to follow a "fiduciary standard,"
will take full effect on Jan. 1, 2018, according to the Labor Department.
The
rule aims to end potential conflicts of interest by brokers who advise on
individual retirement accounts and to protect consumers from buying unnecessary
investment products.
Under
the rule, brokers would have to act in clients' best interests when advising
about IRAs. Industry rules have long required brokers to recommend investments
that are "suitable," based on factors such as an investor's age and
risk tolerance. But brokers can receive significant fees when clients
"roll over" assets from employer-sponsored retirement plans into
IRAs.
The
Labor Department, which regulates retirement plan advice, withdrew its initial
proposal for the rule in 2011 after widespread criticism.
Last
year, it introduced a new draft that raised alarms at financial services firms,
which said the requirements would drive up costs and put affordable retirement
advice out of reach for lower- and middle-income people.
A Labor Department
summary of the final version, however, reflects key changes in response to
industry concerns, said Marcia Wagner, a Boston-based lawyer who advises
retirement plan providers.
"The
department really did listen to a lot of the comments and made an effort, as
much as it’s able to do, bureaucratically and probably politically, with the
more onerous problems," Wagner said.
For
example, the draft proposed an eight-month deadline to comply with the rule,
which firms said was unrealistic. It also listed types of assets that advisers
could recommend in order to steer retail investors away from alternative
investments and other high-risk products.
Under the final
version, advisers may also recommend some in-house investment products, branded
with their firms' names, as well as insurance products such as variable and
indexed annuities.
Brokerages
and many U.S. lawmakers were also concerned about a requirement that brokers
sign "best-interest contracts" with clients at initial meetings. The
document was to include investment projections, fee disclosures and other
detailed information.
While the contracts
remain in place under the final rule, they can now be as short as a paragraph,
Labor Secretary Thomas Perez said, and can be signed later along with other
paperwork when customers open accounts.
The
final version also loosened compensation guidelines, allowing advisers to
collect "common types of compensation," such as commissions and
revenue-sharing, where brokerages receive payments from mutual-fund companies
to help promote products.
Nonetheless,
implementing the rule will be costly and challenging for firms, Wagner said.
She said they would have to train and monitor the many employees who have never
been fiduciaries, as well as draft new disclosures for client paperwork.
(Editing by Leslie Adler and Lisa Von Ahn)
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