NEW YORK -- President Barack Obama's administration is backing a proposed rule that would force stockbrokers to look out for the best interests of their clients, rather than pushing risky and costly investments in a rush for big commissions.
The new rule would require brokers handling retirement accounts to put the interest of their clients ahead of their own, a so-called fiduciary standard long required of lawyers, doctors and some financial professionals such as registered investment advisers.
Under the current rule, brokers must limit their recommendations to what is "suitable" for clients based on their financial situation and appetite for risk. That's too weak, critics say. Brokers don't have to offer cheaper alternatives or keep an eye on the investments. Critics say the current rule has allowed brokers to invest too much of their clients' money in high-fee mutual funds that erode returns over the years, or put it in risky products that can wallop the clients with losses.
In announcing its support for stricter standards, the White House cited a report from its Council of Economic Advisers that estimates brokers with conflicts of interest are cutting returns in individual retirement accounts by 1 percent a year, or about $17 billion.
And if brokers were held to the same standard as doctors or lawyers, critics say, fewer would be cleared of wrongdoing by the Financial Industry Regulatory Authority, an industry-funded group that oversees arbitrations and can impose fines and other penalties.
"When they give bad, conflicted advice, they should be held liable, and they're not," says Mercer Bullard, a law professor at the University of Mississippi. "Unless they're a fiduciary, it's very difficult to win that case."
A lobby group for the securities industry, the Securities Industry and Financial Markets Association, is trying to kill the rule, which was proposed by the Labor Department. It fears officials there lack expertise about the brokerage industry and will write the rule in a way that will make it too costly for brokers to help clients with small accounts.
Brokers are especially busy dispensing advice when people change jobs or retire and have the option of rolling over 401(k) accounts into IRAs, products that the Labor Department oversees. Investors transferred $350 billion into IRAs in 2013, a 45 percent jump in four years, according to researcher Cerulli Associates. Switching to one allows them to choose among many more funds and investment products than are typically available in a 401(k). But a 2013 study by a congressional auditor found that such moves were often a mistake because they can trigger high fees and commissions, and many investors are confused about the costs.
Stephen Meadows, a retired architect, lost more than $100,000, a fifth of his original investment, according to estimates from a lawyer trying to get the money back in arbitration. His broker put him into nontraded real estate investment trusts that pay large commissions to those selling them but that are difficult for investors to unload in a pinch.
Meadows said his broker never told him about the commissions, typically 7 percent of what's invested, or the risks. But he rejected the notion that he should have known better.
"If people want me to design a building for them, I don't expect them to know how to do that," said Meadows, 63.
When he wanted to sell one of his trust investments, he was told he could only get back 4 percent of what he had invested. His former broker, John Martin, citing the arbitration, said he can't talk about the case or his commission.
Business on 03/31/2015