One of President Obama’s top second-term priorities will be realized Wednesday with the finalization of a major new rule meant to curb conflicts of interests in financial advising that has the potential to reshape the retirement planning industry.
The Labor Department is set to publish the final rule Wednesday, a year after it was proposed and 13 months after Obama called for it at an event at the AARP. Labor Secretary Tom Perez and Obama economic adviser Jeff Zients are expected to announce the rule Wednesday at an event at the Center for American Progress in Washington, with Massachusetts Sen. Elizabeth Warren and other members of Congress.
The new regulations would broaden the category of financial advisers, brokers and agents who are required to act in the bests interests of their clients.
Many brokers and insurers currently are not held to that “fiduciary” standard. As a result, according to the White House’s research, savers lose $17 billion annually because their agents steer them toward inappropriate high-fee products for which they receive kickbacks. At particular risk are people rolling over company 401(k)s, for which their advisers are fiduciaries, into Individual Retirement Accounts.
The new fiduciary rule, which has received stiff opposition from the financial services industry, would take effect in April 2017, shortly after Obama leaves office, but it faces still more obstacles before it changes the way financial advising works. House Speaker Paul Ryan has pledged to try to block it from ever taking effect, and business groups have suggested that a legal challenge may be in store.
Republicans have warned that many small businesses and low-income savers will lose access to advice under the new rules, because of the potential legal costs and paperwork.
“These new rules will level the playing field so that retirement advisers will compete based on the quality of advice they give,” said Zients, director of Obama’s National Economic Council, in a phone call with reporters Tuesday. “Make no mistake, there are some powerful interests aligned against us, insisting that the only good rule is no rule at all.”
Zients added a warning to industry critics of the fiduciary standard: “If your business model rests on bilking hard-working Americans out of their retirement money, then you shouldn’t be in business.”
The final rule includes many changes to the version proposed a year ago, in response to the massive feedback, including four days of public hearings.
Specifically, reacting to concerns that advisers could be held liable to savers just for advertising their companies or even talking about investments on talk shows or in print, the rule guarantees that purely educational activities won’t trigger a fiduciary duty to investors.
The final rule also modifies the contract that advisers can sign with clients to guarantee that they will act in their interests and still work on commission. The list of assets that could be sold within the contract is gone, and any asset will be eligible.
Many small businesses that offer 401(k) plans will be given relief from the requirement. Under the proposed rule, businesses would have had to manage at least $100 million to be considered large and sophisticated enough to be given a carve-out. The final rule responds to industry criticism of that cut-off by lowering it to $50 million.
More latitude, too, is given to proprietary products, such as annuities, for which it might be harder to establish that they are the best option for the client. Also, the disclosure requirements for advisers were slimmed down.
The combined changes are unlikely to mollify the industry. Ahead of the rule’s release, David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said that unless the group sees “fundamental changes, this rule will remain unworkable and we will consider every approach to address our concerns.”
Nevertheless, the Obama administration argued that the rule would go far in aiding the middle class in preparing for retirement.
“I am quite confident that the industry will be able to comply,” Perez told reporters Tuesday.
The industry argument that it will be unable to serve low-income people under the fiduciary standard “is akin to saying that doctors and lawyers who practice in underserved communities ought to be allowed a little malpractice,” Perez said.
