Starting Friday, financial advisers who manage retirement accounts will be required by the Labor Department to act in the best interests of their clients.
The new rule requires financial advisers to act as fiduciaries, meaning they must disclose all fees and commissions and put clients' interests above their own compensation or their company's profits. That prevents advisers from concealing any potential conflicts of interest.
While parts of the retirement adviser rule are scheduled to take effect Friday, the Labor Department said enforcement won't start until Jan. 1.
"Ultimately, the change is going to come more on the client's side than the adviser's side," said Bob Williams, senior vice president and managing director of Simmons First Investment Group Inc. in Little Rock. "And the sad part is I think there could well be some unintended consequences as a result of this rule."
Acting as a fiduciary means you're doing what's in the best interest of clients, said Tim Quillin, a partner with Aptus Financial in Little Rock. It's a higher level of accountability than the suitability standard used by brokers, planners and insurance agents who work with retirement accounts.
"It's a little sad that we need regulations to define investment advisers as fiduciaries to retirement plans," Quillin said. "That should be fundamental to what our goal is as an investment adviser."
The suitability standard meant that if investment advice met a client's defined need and objective, it was considered appropriate, Quillin said.
Now, financial professionals will be legally obligated to put their client's best interests first rather than simply finding suitable investments. The new rule, therefore, could do away with the commission structures prevalent in the industry.
"What the fiduciary rule is trying to do is curb some of the worst abuses in the financial services industry," Quillin said.
In essence, the Labor Department wants retirement advisers, in a fiduciary capacity, to charge a fee in lieu of a commission, Williams said.
"Basically you eliminate the commission so there is no conflict of interest on choosing investment A vs. investment B," Williams said.
Smaller accounts may not be economical for some brokerage firms to manage, Williams said.
"So what's going to happen is some of those [small investors] who most need the help of a broker or an adviser aren't going to have access to them anymore," Williams said.
Williams figures it will cost more for the brokerage firm in the short term.
If a firm has a $10,000 account and charges a fee of 1 percent a year, that is only $100, Williams said. That could be too little to make keeping the account cost effective.
Aptus Financial charges an hourly fee instead of a percentage fee or a commission, Quillin said.
"The only thing we do is give nonconflicted advice," Quillin said. "We sell no products."
A good financial adviser will always do what's in the best interest of the client even without the rule, said Paul Spann, senior vice president with Lieblong & Associates in Little Rock.
"That's what the fiduciary rule is trying to enforce," Spann said. "But rather than have [Securities and Exchange Commission] rules that can be followed, they have these vague policies that are going to be enforced by class-action lawsuits rather than auditors."
Spann said the rule will make it difficult for small investors -- those with less than $100,000 in an account -- to find an adviser to help them because of the possible liability.
"[Small investors] are going to have difficulty finding someone to help with rolling over [a retirement account] because of the rules that [will be] in place," Spann said.
The argument could be made that a small investor would be better off with no advice than bad advice, said Sarah Catherine Gutierrez, partner and founder of Aptus Financial.
The average retiree with a small brokerage account outside of a 401(k) could open up a retirement account with Vanguard or Charles Schwab and just buy a target retirement date fund.
"One fund gives literally an entire asset allocation based on retirement year and exposure to all U.S., international stock and bond markets," Gutierrez said. "And the cost is so low it would add up in the tens of dollars even for a $100,000 account."
In the long run, the rule change will be good for clients, said one financial adviser who asked that he not be identified.
"On a case-by-case basis, it will hurt me financially a little bit, and it will hurt some of my clients financially a little bit," the adviser said.
But in the short run, it will affect ways he does his business, including how he bills clients, he said. And it will increase costs to some of his clients.
Business on 06/08/2017
Print Headline: Fiduciary rule to roll out for advisers