By the time you read this, the US Department of Labor is expected to have released new regulations that will impose fiduciary obligations on brokers who provide investment guidance with respect to retirement accounts. Currently, brokers are required only to recommend investments that are “suitable” for the particular client.
The shift is unlikely to have a material impact on investment management firms registered as investment advisers; those firms already are obligated to act in the best interests of their clients. However, the rule is expected to be burdensome for small, independent brokers who rely on commissions.
Proponents of the new rule argue that the uniform higher standard is necessary because retail clients do not understand the distinction between financial professionals who are brokers engaged in selling securities versus those that are investment advisers providing financial advice for a fee.
Perhaps the inherent complexity of investments is to blame. Consumers presumably are capable of understanding when a realtor is trying to sell a piece of property rather than trying to find the property that may be in a house-hunter’s best interests.
The new rule may accelerate the trend toward the use of fee-based investment advisers rather than commission-based brokers. Brokers would need to justify that their investment recommendations were intended to be in a retirement client’s best interests and not for the purpose of increasing the brokers revenues. It also is possible that the rule change makes it more difficult for retail investors to access more sophisticated or “alternative” investment products or strategies, because financial professionals will be reluctant to make recommendations that with the benefit of hindsight might not be perceived as being in the client’s best interests.
Only time will tell which financial firms will benefit or suffer from the rule change. All brokers and advisers dealing with retirement account clients, however, should carefully assess how the rule will impact their operations, compliance programs, and marketing efforts.