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New Fiduciary Rules Rock the Investing World

by Chris Poindexter

The boiler rooms full of people selling penny stocks in movies like The Wolf of Wall Street might be history after a new set of rules governing the sale of investments goes into effect. Called the “fiduciary rule” the changes to the investment industry could be the biggest changes to come to the industry since 1974 when Congress authorized 401(k) retirement plans. Others have described the impact as being bigger than the change the Affordable Care Act made on the medical profession.

The stakes are high with IRAs holding seven-point-four trillion in assets and defined contribution plans holding another six-point-eight trillion, according to estimates. Research firm Cerulli Associates reported new money from IRA rollovers contributed $377 billion to IRA assets in 2014, and projects the rollover figure to hit $516.9 billion by 2020.

In the past anyone selling investments had only to meet what was called the suitability standard. The old rules set a fairly low bar that said the investment had to be suitable for a particular client, but now brokers will have to meet a stricter standard. Once the new rules fully go into effect, brokers and traders will be required to act in the customer’s best interests. The new rules will cover almost all investment classes from IRAs and stock brokers to insurance agents and financial advisors.

Some high-fee investments, like annuities, can still be sold into retirement accounts but the disclosure required about fees and expenses will be significant. Brokers will, in some cases, need to send customers email notices that they’re paying commissions. Either way, if a dispute arises, consumers will be armed with a powerful new tool in settlement negotiations.

The final version of the rule incorporated some changes that allowed investment houses to sell proprietary investment products but they will still have to meet the stricter fiduciary test when giving investment advice to clients. Not all investment houses and brokers are against the new rules and many believe the new rules will cut down on the number of bad actors in the investment field.

Raising The Cost Of Retirement Advice

Some of the arguments against the new rule are a bit vague. Representative Scott Garrett, R-N.J.claims the new rules will raise the cost of retirement advice but many banks and investment houses have voluntarily adopted the stricter standard and Rep. Garrett did not provide reasoning about why costs would increase. Proponents argue that so called robo-advisers, that can be programmed with fairly specific recommendations, will be able to serve the needs of individuals who need low-cost services.

It’s Mainly About Commission Products

The main target of the rules seems to be commission investments. Under the suitability standard the cost to the client did not necessarily enter into the calculation. Commissions are incentive for a broker to act in their own interest rather than those of the client. Investors will no longer have to guess about the motivation of brokers and those giving investment advice. Anyone selling a commission product must document to clients that the broker or dealer is acting in customer’s best interest. There will be some fairly stiff penalties for those ignoring the new rules.

Specific Exceptions

There are specific exceptions in the new rules for educational efforts. Advisors and plan managers can continue to provide general educational materials about investing and asset classes without triggering the fiduciary rules.

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