Butch Femme Planet - Retirement

‘Customers First’ Becomes the Law in Retirement Investing

Under new regulations for financial advisers issued Wednesday, said Secretary of Labor Thomas E. Perez, putting customers first “is no longer a marketing slogan. It’s the law.”

The rules governing how financial professionals handle the trillions of dollars they invest on behalf of Americans saving for retirement are about to get a lot tougher.

The government move is expected to encourage a shift of retirement funds into lower-cost investments — potentially saving billions of dollars for many ordinary investors — while setting off one of the biggest upheavals in the financial services industry in decades.

The Labor Department, after years of battling Wall Street and the insurance industry, issued new regulations on Wednesday that will require financial advisers and brokers handling individual retirement and 401(k) accounts to act in the best interests of their clients.

“The marketing material that I see from many firms is, ‘We put our customers first,’” Thomas E. Perez, the secretary of labor, said in an interview. “This is no longer a marketing slogan. It’s the law.”

The new regulations, which may be challenged in court, were formally proposed a year ago and were modified after hearings and industry criticism. They are not expected to take effect until next spring at the earliest.

Many consumers assume the individuals and firms investing their money are operating under the same sort of ethical and legal standards as a family doctor — someone who is obliged to provide the very best advice.

But brokers are generally required only to recommend “suitable” investments, which means, for example, that they can push a more expensive mutual fund that pays a higher commission when an otherwise identical, cheaper fund would have been an equal or better alternative.

The Obama administration, relying on extensive academic research, estimated that conflicts of interest embedded in the way many investment professionals do business cost Americans about $17 billion, leading to returns that are about 1 percentage point lower each year.

“It has the potential to really change the way advice is delivered to retail investors,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It is a really big deal. Revolutionary, even.”

The so-called conflict-of-interest rule covers only tax-advantaged retirement accounts and does not apply to most other investments. But it could lead to more sweeping changes across the financial services industry, making it harder for some smaller firms to do business and perhaps encouraging a further consolidation into larger companies better able to handle the detailed rules of compliance.

It is also expected to promote a shift away from commissions for individual transactions toward relying more on flat annual fees for managing accounts, a move that would not benefit all investors equally.

Critics of the rule in its earlier proposed form, such as the American Council of Life Insurers, argued that the changes would cost much more than the government estimated because they were based on an “inadequate and flawed” analysis.

“We hope that once published it reflects the concerns of many of the more than 300 members of Congress from both sides of the aisle, the life insurance industry and numerous other stakeholders,” said Dirk Kempthorne, the council’s chief executive.

For the last year, the industry has lobbied Congress to delay or kill the rule, so far without success. Before going ahead with the final rule, the Labor Department held four days of public hearings at which nearly 80 parties testified; it also received more than 3,000 comments on the proposal from consumer advocates, industry stakeholders and others.

“We heard the concerns, we listened, we acted,” Secretary Perez said. “And I think we improved the rule as a result.’’

Generally speaking, the new rules — six years in the making — would require a broader swath of professionals to act as “fiduciaries,” the legal term for putting customers’ interests first. They cannot accept compensation or payments that would create a conflict unless they qualify for an exemption that ensures the customer is protected.

If brokers want to receive certain types of compensation that can pose a conflict, they will be required to offer an enforceable contract that promises to put the customer’s interests first.

The firms must also disclose any conflicts and direct consumers to a website that describes how they make money. Firms can charge only “reasonable compensation,” and they cannot offer advisers financial incentives to act in a way that would hurt investors.

In using the contract, brokers will still be permitted to charge commissions and engage in a practice known as revenue sharing, which allows a mutual fund company, for example, to share a slice of its revenue with the brokerage firm selling the fund. Companies that pay more may secure a spot on the firm’s list of recommended funds.

The rule also aims to protect investors when they roll over money from a 401(k) retirement plan to an I.R.A. Right now, because the recommendation provided is considered “one-time” advice, brokers do not necessarily have to act in the investor’s best interest.

There are piles of money at stake: Individual retirement accounts held $7.3 trillion at the end of 2015, according to the Investment Company Institute, while 401(k)-type plans had $6.7 trillion — money that may eventually be rolled over into I.R.A.s.

Secretary Perez said that government rule makers had made several changes to their last proposal in an effort to respond to the criticism and avoid creating a bias toward certain investment products. He said advisers would not be obliged to sell lowest-cost products if a more expensive product like a variable annuity made sense for a particular individual’s situation.

The industry was also concerned that simply providing educational information could trigger the rule; regulators said that education would not be considered advice until a broker made a specific recommendation.

Wall Street was worried that brokers would need to provide a contract even before they began talking with a potential client. Regulators said the contract could be signed at the same time as other account-opening documents, though any advice given before the signing must still be in the customer’s best interest.

The new rules also simplify disclosures, another industry complaint. For example, firms will no longer be required to disclose performance projections for one, five- and 10-year periods.

There are also allowances for small 401(k) plans. Under the final rules, advisers who provide advice to small businesses that sponsor 401(k) plans, or plans with less than $50 million, as well as advice to participants, can qualify for an exemption from the strictest rules.

Consumer advocates and lawyers say that a robust fiduciary rule will help thwart more unscrupulous brokers, like the one encountered by Russell Kazda, a retired mechanic, and his wife, Christine, a fourth-grade teacher in Illinois.

Their advisers took $172,000 of the Kazdas’ I.R.A. savings and put it in illiquid real estate investment trusts and later invested money in an options strategy. They ended up losing about $125,000.

“I could have had my fourth graders do it and they would’ve done a better job,” Mrs. Kazda said.

Andrew Stoltmann, a securities lawyer in Chicago who represented the Kazdas, applauded the changes.

“By imposing a fiduciary duty standard, this will cause the brokerage firms to self-police,” he said, protecting most people from often unsuitable investments like “nontraded REITs, variable annuities in I.R.A.s and active trading of stocks and options.”