This may be hard to believe, but the best interest of customers are not paramount in the business of advising clients on investment savings.
It takes a new law to put customers first. That’s what it takes to change the mindset that has made retirement vehicles a fee-driving machine for its managers.
More than four years in the making, the new rules issued Wednesday by the Labor Department — referred to as the “Conflict of Interest Final Rule” — will require financial advisers to be held to the so-called “fiduciary” standard. That means they have to put the best interests of their clients ahead of their own interests by recommending the best product — even if that means accepting a smaller fee for their services.
The federal government’s move should encourage a movement of retirement funds into lower-cost investments — potentially saving billions of dollars for many U.S. investors, including those with individual retirement and 401(k) accounts .
In the past, brokers and advisers have been generally required only to recommend “suitable” investments, which means, for example, that they can push a more expensive mutual fund that pays a higher commission when an otherwise identical, cheaper fund would have been an equal or better alternative.
“Plan and IRA investors often lack investment expertise and must rely on experts – but are unable to assess the quality of the expert’s advice or guard against its conflicts of interest,” says the Department of Labor in a written analysis of the impact of the new rules. “Most have no idea how advisers are compensated for selling them products.”
The Department of Labor issued its first “fiduciary rule” in 1975.
“Saving for retirement has changed dramatically since the Department of Labor issued the first fiduciary rule more than 40 years ago, and today individuals are increasingly responsible for their own investment decisions,” said U.S. Treasury Secretary Jacob J. Lew in a statement. “Now more than ever, American families need investment advice that aligns with their interests. The Department of Labor’s work on this rule and engagement with stakeholders will help put the promise of a secure retirement within the reach of more Americans.”
A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors — or about $17 billion per year in total, according to the U.S. Department of Labor’s announcement.