The Obama administration previously said investors would save about $4 billion annually under the new rules. The industry countered that investment firms will have to shell out more than that just to comply with the rules. Financial firms also argued that the stricter rules will likely shrink Americans’ investment options and could cause brokers to abandon retirement savers with smaller accounts.
Americans increasingly seek guidance in navigating their options for retirement savings. Many professionals provide advice. But not all are required to disclose potential conflicts of interest.
Here are some questions and answers about the delayed rules:
BROKERS? FINANCIAL ADVISERS? WHAT’S THE DIFFERENCE?
It’s significant. Brokers buy and sell securities and other financial products on behalf of their clients. They also can provide financial advice, with one key stipulation: They must recommend only investments that are “suitable” for a client based on his or her age, finances and risk tolerance.
So they can’t, for example, pitch penny stocks or real estate investment trusts to an 85-year-old woman living on a pension. But brokers can nudge clients toward a mutual fund or variable annuity that pays the broker a higher commission—even without disclosing that conflict of interest to the client.
Registered investment advisers, on the other hand, are “fiduciaries.” In that way, they’re more like doctors or lawyers—obligated to put their clients’ interests even ahead of their own. That means disclosing fees, commissions, potential conflicts and any disciplinary actions they have faced.
Advisers must tell a client if they or their firms receive money from a mutual fund company to promote a product. And they must register with the Securities and Exchange Commission, thereby opening themselves to inspections and supervision.
WHAT DO THE RULES IN QUESTION DO?
They put brokers under the stricter requirements when they handle clients’ retirement accounts. The Labor Department under the Obama administration withdrew an earlier proposal in 2010 amid an outcry from the financial industry, which warned that it would hurt investors by limiting choices.
The rules update the Employee Retirement Income Security Act, known as ERISA, enacted in 1975. That was a far different time. Traditional company pension plans were still the dominant source of retirement income. Now, traditional pensions are increasingly rare. In their place are 401(k)-type plans, which require workers to set aside pre-tax money but also add a new layer of risk: Employees themselves must decide how to invest their retirement money, and many seek professional advice.
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