How Retirement Advice Is About to Change

retirement_roadMy Comments: Retirement planning is one of the principal tasks of my practice. In fact, I will soon start teaching a new course sponsored by the American Financial Education Alliance (AFEA) to promote financial literacy. I’ve created a Chapter of AFEA here in Alachua County with my target audience people between the age of 55 and 70.

The article below speaks to the efforts of financial planners, against the headwinds created by Wall Street, to cause all advisors giving investment advice to be bound by ‘a fiduciary standard’. This means what we say and do and cause to happen MUST BE IN THE BEST INTEREST OF THE CLIENT.

This is the same standard that applies to doctors and lawyers and CPAs and even architects. Wall Street is moving heaven and earth to be exempted from this standard; they want to keep their employees bound first to their employer, and not the client.

By Matthew Kassel – April 3, 2016

A big rule change is coming from the Labor Department that will enforce tighter standards on retirement-account advice.

Six years in the making, the rules require brokers and other financial professionals offering retirement advice to operate under a “fiduciary” standard, meaning they have to keep their clients’ best interests in mind when giving advice on money in individual retirement accounts and 401(k)s. At the moment, brokers need only make “suitable” recommendations, which can lead to conflicts of interest, such as recommending items that may be fine for investors but that the broker has a stake in selling.

The regulations are meant to help investors make the most cost-effective savings decisions and get rid of hidden fees. But the pending standard—which may be completed as early as this week—could also reshape how investors do business with their financial advisers, brokers and industry analysts say.

Here’s a look at some of the ways the relationship may change.

1. A new layer of paperwork

One big change will affect IRA holders working with brokers who take commissions, says Stephen Wilkes, an attorney at San Francisco’s Wagner Law Group, which specializes in retirement law and represents brokers.

Under the fiduciary standard, commission-based accounts won’t be permitted unless investors sign a new type of agreement called a best-interest contract. This allows advisers to recommend investments they’re getting paid to sell, but only if it is in the client’s best interest and with detailed disclosure of the adviser’s potential compensation.

The Labor Department and some supporters of the best-interest-contract exemption, or BICE, in the brokerage industry say that BICE is practical and ensures that brokers can still receive commissions. Brokers, though, say some aspects of the contract require an onerous level of disclosures, and could add tension to the client-broker relationship.

“I’m fearful that the very investors we’re trying to protect might become more paranoid as we’re asking them to sign pieces of paper,” says Andrew Crowell, president of Crowell, Weedon & Co., a money-management firm in Los Angeles.

If investors don’t want to sign the contract, in some cases they can convert their IRAs to fee-based accounts, which don’t take commissions that entice advisers to operate in their own interest.

Brokers, however, argue the fees may be too expensive for some, especially if the investor is paying an adviser only sporadically for transactions, such as a brokerage account that holds only a target-date retirement fund. The added fees might then require investors to pay more for the same level of care.

2. Possibly getting dropped
Small investors with modest IRAs also face the possibility of getting dropped, brokers warn, since some advisers may not want to deal with the regulatory hassles required to hold on to less profitable accounts. According to a report by Fidelity Investments, 62% of 485 advisers surveyed say they plan to let go of some smaller, commission-based accounts or help them move to other firms.

“People are going to say, ‘Gosh, if I’m dealing with [a big investor’s] IRA with $1 million in it, I’m willing to jump through some hoops’ ” to comply with the rules, Mr. Wilkes says. “ ‘But what about Joe Middle America who has $35,000 in his IRA? Do I even want to bother?’ ”

3. Changing conversations
Another thing that will change is the complexion of the conversations advisers are allowed to have with their clients, says Fred Reish, a partner at Drinker Biddle & Reath who specializes in fiduciary issues.

Under the “suitable” standard, for example, brokers are free to make distribution recommendations to clients. Postregulation, an adviser who doesn’t have a signed BIC would only be allowed to educate clients about choices; he or she couldn’t recommend a client roll over money from a 401(k) to an IRA on which the adviser will earn compensation, because it would be considered a conflict under the new standard.

Mr. Reish says there isn’t a specific carve-out that would allow that transaction to take place, at least as the regulation was last laid out. So if the investor wants more advice, it will be hard for the adviser without a BIC to make a prudent suggestion without triggering the fiduciary standard.

Despite the hiccups analysts are envisioning, Chris Call, president of ABD Insurance & Financial Services Inc. in San Francisco, says the impending regulations will be good for the industry, getting rid of waste and excess compensation.

“On the whole, it’s an awesome thing,” Mr. Call says. “It’s going to save tons of money.”