Financial advisers would have to adhere to more stringent standards when giving advice on 401(k) plans, IRAs and other retirement accounts under a rule proposed Tuesday by the U.S. Department of Labor.
The proposed rule would protect people saving for retirement from being steered into accounts with high fees and commissions that benefit the adviser at the expense of the saver. It would force financial professionals to act in the best interest of their clients — a move that advocates say would prevent retirement savers from losing an estimated $17 billion a year in hidden fees.
“Times have indeed changed. The regulatory structure must change with the changing times,” Labor Secretary Tom Perez said during a conference call on the proposed rule.
The new rule would require that brokers and other advisers act as “fiduciaries,” which means putting the customer’s interest first. While some advisers do act as fiduciaries, others are required only to make sure an investment is “suitable” for an investor — a much lower standard.
“AARP has heard from thousands of Americans who want to make sure that investment advisers give advice in their clients’ best interest,” AARP CEO Jo Ann Jenkins said in a statement Tuesday. “Though many already give sound advice, we hope to see this conflict-of-interest loophole closed for all who give investment advice to their clients.”
Under the proposed rule, brokers and their firms would promise in a contract to provide advice in the client’s best interest. They also would have to disclose any conflicts of interest, including hidden fees or backdoor payments. And firms must adopt policies to reduce conflicts of interest.
Investors, in turn, could take a private action against advisers who violated their fiduciary responsibility. Though a contract could mandate that individual disputes be dealt with through arbitration, it also must permit class action lawsuits in cases involving multiple investors.
Firms would still determine how to compensate their advisers and brokers, so commissions and other common forms of payment would still be permitted.
Also, brokers would not be subject to a fiduciary standard if they were merely transacting a trade. And Perez said employers could still provide general financial education to workers without triggering a fiduciary duty.
The proposed rule will be open for public comment for 75 days. The Labor Department will also hold a hearing on the proposal to solicit public comment before issuing any final rule.
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