The $14 Trillion Fix: Advisers Now Must Put Your Retirement First

Rule unveiled this week bars financial counselors from pushing funds on clients to pump up their commissions.

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Photographer: Getty Images

How much jargon should a person have to master to save for retirement? Consider the word “fiduciary.” According to a survey paid for by retirement adviser Financial Engines, only 18 percent of adults were sure they knew what it meant in the context of investment advice. A fiduciary is someone who legally must put the client’s interest before his or her own. Only some financial advisers, such as registered investment advisers, are fiduciaries. The others have to ensure only that an investment is suitable—no risky tech funds for an investor seeking safety—but they can recommend an option that pays a better commission.

Ian MacGregor, a consultant in Dublin, Ohio, wasn’t always aware of the difference. He says his broker would present him a choice of mutual funds but tended to push ones with upfront fees as high as 5 percent. He’s since switched advisers. “There’s got to be some way to protect the less savvy investor from being taken for a ride,” he says.

On April 6, the U.S. Department of Labor unveiled a rule change, more than six years in the making, to hold more advisers to the tougher clients-come-first standard. Using its power to regulate retirement and pension plans, the department will define as fiduciaries people and companies giving advice on 401(k) and similar plans as well as individual retirement accounts. That’s a $14 trillion pile of assets. The regulation will still allow brokers to collect commissions, but they’ll have to disclose conflicts of interest. Strengthening customers’ ability to sue, the rule also adds teeth to enforcement.

The rule was supported by President Obama. The administration produced a study showing that bad advice costs retirees a collective $17 billion annually. Insurers, brokerage firms, and fund companies bitterly opposed draft versions of the rule, saying it will make it too costly to advise people with small accounts.

The standard will “force financial advisers to change how they speak to their clients and start justifying the fees that they charge,” said Michael Wong, an equity analyst at Morningstar, before the final rules came out.

Companies such as Vanguard Group and BlackRock that provide low-cost index and exchange-traded funds will likely benefit from the rule, Wong said, because it forces advisers to justify higher-cost recommendations. Insurance companies that sell retirement products may suffer, because they often rely on a commission-based sales force. The American Council of Life Insurers has called the initiative “government at its worst.”

Some companies are already adjusting. Lincoln National has been shifting its sales focus away from investments called variable annuities with living benefits. MetLife Chief Executive Officer Steve Kandarian says the prospect of new rules “had an impact” on his decision to separate the company’s U.S. retail unit. Last year he likened the proposal to requiring a Chevy dealer to recommend a Ford if it’s a better fit for the customer.

The rules take full effect in 2018, but they’re likely to face challenges in both the courts and Congress.

The bottom line: New standards for the $14 trillion retirement market could reshape how investors get advice.

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