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Saving for Retirement

8 Things You Must Know About the New Broker Rule

Uncle Sam is raising the bar for advice that brokers give to retirement savers.


A controversial new rule issued by the U.S. Department of Labor aims to improve the quality of advice that investors receive regarding their retirement accounts. The rule requires that financial professionals who give advice on retirement accounts act as fiduciaries for their clients, meaning that they must put their clients’ best interests ahead of their own financial gain, disclosing their forms of compensation and any conflicts of interest. Here’s what you can expect.

See Also: What the Government's New Financial-Adviser Rule Means to You

1. What’s behind this new rule? Today, brokers are generally not required to put their clients’ interests first when recommending investments. Rather, they merely need to suggest products that are “suitable” for their clients based on the clients’ goals, age, risk tolerance and so forth. By contrast, registered investment advisers, another class of financial professionals, are always required to put clients’ interests first, even though these advisers provide exactly the same services as brokers (whether someone is a broker or an adviser depends on how they are licensed and regulated). Because of that, it can be difficult for the average investor to glean whether a financial professional is offering objective advice with no financial interest or is acting more like a salesperson.

2. What does the new rule do? Essentially anyone who provides investment advice for a retirement account in exchange for compensation—including brokers, advisers and insurance agents—must act as a fiduciary. In other words, financial professionals who have acted as salespeople must now consider what’s best for your finances, rather than what’s best for their own.

Although the rule will have repercussions across all sorts of retirement accounts and products, it primarily targets (and will have the greatest impact on) high-commission products sold for rollover IRAs. Rollover IRAs have become hot spots for high-fee, poor-performing investments, such as variable annuities and nontraded real estate investment trusts. The rule doesn’t bar an adviser from recommending any of those products, but it does limit them to charging “reasonable” fees, and it requires firms that charge commissions to jump through some cumbersome hoops. As a result, such products may disappear from IRAs altogether.


3. How does the rule affect me if I invest through a discount broker, as opposed to using a full-service broker? It’s unlikely that anything will change for you if you manage your own IRA with a discount broker and no one gives you investment advice. Because financial firms are still trying to determine their responsibilities in light of the new rule, it’s less clear what will happen if you work with a full-service broker. One possibility is that brokers who currently rely on commissions generated through transactions (the purchase and sale of stocks, for example) will gravitate toward charging clients a percentage of the assets they manage. Some financial-industry observers predict that the rule might force full-service firms to jettison customers with smaller accounts. Registered investment advisers who charge commissions will face similar pressures.

4. Will I see new paperwork? If you work with a broker, adviser or insurance agent who plans to continue charging commissions or receiving other compensation that could create a conflict of interest, your contract with that person will change to reflect additional requirements of the new rule. (If you are an existing customer, this will likely show up in your mailbox as a proposed amendment to your current contract; if you are a new client, it will likely be rolled into your other account-opening paperwork.) In particular, your adviser, broker or agent’s firm will have to commit to providing advice that’s in your best interest and to charging “reasonable” fees. Plus, firms will have to adopt policies and procedures to minimize the effects of potential conflicts of interest (the rule doesn’t specify exactly what these policies and procedures should entail).

5. What does this mean for my 401(k)? If any financial professional gives you individual investment advice about your 401(k), that person must, under the new rule, act in your best interest. Otherwise, the rule’s impact on your 401(k) will probably be fairly subtle. The main change is that some financial professionals who previously didn’t have fiduciary obligations when working with your plan sponsor (that is, your employer) will now have such responsibilities. For example, a broker who recommends a specific menu of investment options to your employer might not have had fiduciary duties in the past but will be obligated to act in the best interest of the plan under the new rule.

6. Does this mean I’ll earn more on my retirement investments? The rule will make a big difference in the returns of those people who might otherwise, because of bad advice, have purchased high-fee products such as variable annuities or nontraded REITs in their IRAs.


For everyone else, the rule’s effect on returns will likely be more modest. The rule reduces the chances that anyone will advise you to do a rollover. Keeping money in a 401(k) instead of rolling it into an IRA can boost your returns slightly because 401(k) mutual funds typically charge lower fees than funds available in an IRA. If you work with a full-service broker or adviser who currently charges commissions, it’s possible that the fee structure on your account or the mix of investments in your IRA could change. Whether that hurts or helps your returns will depend on your individual situation. If you already work with an adviser who charges fees instead of commissions and who recommends low-cost products, the rule likely won’t affect your returns at all.

7. So does my adviser have to recommend the lowest-cost products now? Not necessarily. The rule effectively establishes a loophole for firms that sell only proprietary products—investments that are managed in-house or by affiliated entities (for example, Wells Fargo funds are proprietary to Wells Fargo Advisors). Under the rule, brokers and others who sell only proprietary products aren’t required to recommend or even mention competitors’ products, even if they carry lower fees.

But the rule could save investors money by reducing the use of mutual funds that levy charges known as 12b-1 fees on top of management fees and other costs of doing business. These fees, which run as high as 1% of assets annually, are used to compensate brokerage firms and advisers. Consumer advocates have long decried 12b-1 fees because, they say, the charges are difficult to understand.

In any case, financial professionals won’t be required to recommend the lowest-cost options. “There’s no obligation for fiduciaries to automatically recommend the lowest-cost products, but if they’re recommending pricier products they have to have legitimate reasons for doing so,” says Andrew Stoltmann, a Chicago lawyer who represents investors in arbitration disputes with their brokers. Legitimate reasons might include, for example, recommending a fund that provides exposure to emerging markets or another asset class that offers extra diversification but typically charges above-average fees. We don’t think the new rule will bar brokers from recommending actively managed funds with reasonable fees, even if those charges are well above those of comparable index funds.


8. When does the rule take effect? Its main provisions, including imposing a fiduciary status on advice providers, take effect on April 10, 2017. The extra requirements for financial professionals who accept commissions don’t fully kick in until January 1, 2018.

What’s Not Covered

Taxable accounts. The new rule covers only advice pertaining to retirement accounts.

Educational materials. Furnishing objective information on certain topics, as long as an adviser or broker isn’t making an investment recommendation, doesn’t trigger a fiduciary relationship. Such communications could include information on hypothetical asset allocations and worksheets to estimate your retirement-savings needs.

Advice that predates the rule.Advice provided before April 10, 2017, isn’t covered by the new rule, and your adviser or broker can continue to receive compensation after that date for recommendations made before that date. However, any advice given after that date regarding your old investments would be held to the new rule’s standards.

A “hire me” recommendation.Professionals can urge you to invest your retirement accounts with them or with their firms even if doing so is not actually in your best interest.

See Also: I Fear the New Fiduciary Rule Won't Protect You Enough