By Jim Sullivan
Do you trust your investment broker when he or she recommends a stock, bond, or mutual fund for your retirement account? How about when it comes to those fee-heavy and complex products like variable annuities or variable life insurance policies? Surely your broker has your best interests in mind. Think again. Though there are certainly many exemplary brokers who indeed put their customers first, the unfortunate truth is that the broker-dealer industry operates with many conflicts of interest that can potentially drain cash from your account—helping to line your broker’s pockets instead of your own. However, a pending proposal from the Department of Labor (DOL) aims to level the playing field for those who often need the protection most—401(k) and IRA investors.
In April the DOL released a proposed regulation entitled “Conflict of Interest Rule—Retirement Investment Advice.” The main thrust of the regulation is that it would require brokers who provide investment advice to 401(k) and individual IRA accounts to be held to a “fiduciary” standard instead of the current, and less stringent, “suitability” standard. Relatedly, brokers would not be allowed to receive certain types of compensation (like sales commissions, 12b-1 fees, etc.) without fulfilling various disclosure requirements and assuming a contractual obligation to act in their customer’s “best interest.” The bottom line: These proposed requirements would likely make it more difficult for brokers to recommend high-cost investments when lower-cost, more appropriate products, are available.
Some background: When a broker acts under the “suitability” standard, he or she can recommend any investment that is, just as it sounds, merely suitable for the customer. Though many factors are typically taken into account to determine suitability—age, risk tolerance, liquidity needs, etc.—the bottom line is that a broker has no duty to recommend the investment that would ultimately be in the best interest of the customer. This latter standard typically comes only with a fiduciary duty.
Some have argued that a uniform standard should be applied to all investor accounts—not just tax-sheltered retirement accounts. That may or may not be an ideal outcome. However, it’s probably fair to say that the DOL’s proposal regarding 401(k) and IRA accounts is a step in the right direction. When it comes to these tax-sheltered accounts, the federal government defers, or in the case of Roth IRAs, completely forgoes tax revenue that would otherwise be collected. In turn, the account holder assumes a certain responsibility to manage the account so that it helps provide a secure retirement ten, twenty, or thirty-plus years down the road. With such significant implications, retirement investors deserve advice from their brokers that they can count on.
The public comment period for the DOL’s proposal closes on July 21, 2015. To submit a public comment approving (or disapproving) of the proposal, please click here.