Avoid the fiduciary rule
Christine Beaudin
Robert B. Kuppenheimer
For more than year, the futures of Individual Retirement Account investors and their financial advisors has hung in the balance of multiple developments – from the publication of a new regulation last April to the presidential election in November, to an executive order signed by President Donald Trump.
At issue are changes to the Employee Retirement Income Security Act (ERISA) determined in April 2016. They were scheduled to take effect this month, although Trump's executive order has postponed their implementation and required the U.S Department of Labor to revisit the rules.
While the delay is encouraging, rescinding this fiduciary rule is not yet a done deal. The Obama Administration drafted the changes in fiduciary practices with the intention of protecting retirement savings from questionable investment advice, saying any investment advice must occur in the best interest of the client.
Advisors would argue the requirements – making sure financial advisers act in their clients' best interest, be transparent about fees and commissions, and avoid conflicts of interest – are widely practiced. The entire industry is being held accountable for unprincipled actions of a few.
Under the new rule, any rollover advice would trigger a fiduciary relationship. Advisors who are commission-based need a best-interest contract with clients in order to earn a commission from any IRA rollovers.
Additional costs assumed by advisors will likely be passed along to the consumer and ultimately make a rollover more expensive and possibly out of reach for some Americans. One of those added costs would stem from the increase in legal liability advisors would now face under the new rule, resulting in the need for more malpractice insurance.
Any shortage of advisors or costly increases will have a far-reaching impact on many Americans. It is estimated that 85 percent of new traditional IRA accounts stem from rollovers, and the overwhelming majority of those account holders are older Americans. At the end of 2015, there were approximately 40.2 million households with at least one IRA.
The clear winner here is the DOL since the agency expanded its governance over IRAs. The investment product makers would be on the winning side. Their current fee structure may initially be impacted, but the upfront sales load fees will just end up as an increase in expense ratios.
The clear losers are the households with IRAs and advisors as they face an increase in liability and less revenue due to the additional costs and for some the loss of revenue from working with individuals with a less substantial portfolio. The risk-reward scenario for advisors is simply not in their favor to advise clients with fewer assets.
Professor Christine Beaudin chairs the finance department at Nichols College in Dudley. Robert B. Kuppenheimer is an alumnus of Nichols College and serves on its board of trustees.
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