New rules would make advisers put investors first

John Waggoner | USA TODAY

Show Caption Hide Caption Obama to revamp investment retirement accounts President Barack Obama calls for tighter rules on retirement account brokers, reigniting a confrontation with the financial services industry over rules affecting trillions of dollars in 401k and other savings accounts.. (Feb. 23)

President Obama has proposed new rules that would require a higher standard for those who offer advice on retirement accounts — one that some brokers say should apply to all financial advice.

The new Department of Labor rules would require brokers to be held to a fiduciary standard, meaning that they must put their clients' interests above their own. For example, given the choice between two similar funds, the broker would have to recommend the one with the lowest fees and commissions.

The current standards only require that investments be suitable for the investor, which allows brokers and other advisers to choose investments that will pay them more in fees and commissions.

"It's a modest, wildly overdue step in the right direction," says Gary Schatsky, a New York fee-only financial planner. "The greatest value that can be obtained by implementation of these new rules will be if this is what the public starts demanding from all their financial advisers. "

Not everyone is excited about the rules. Brokers argue that they need higher commissions to make advising smaller clients worthwhile. And, they say, the rules would add another layer of regulation to brokers.

"We have ongoing concerns that the Department of Labor and the White House have completely ignored the existence of the robust regulatory regime under SEC and FINRA, and this re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers," said Kenneth Bentsen, president and CEO of the Securities Industry and Financial Markets Association. The DOL re-proposal could ultimately raise the cost of saving and hurt all Americans trying to save for retirement, particularly middle-class workers."

Schatsky says that advisers are in a position of confidence with their clients and should put their customers' interests first, even if those accounts aren't as lucrative. "Would you want an unethical medical clinic to open because it's the best we can do for poor people?"

SEC Commissioner Daniel Gallagher argued in a speech Friday that consumers would benefit from the greater choices that the suitability standard offers. "This is something the nanny state has a hard time comprehending."

Josh Brown, CEO of Ritholtz Wealth Management and author of Backstage Wall Street, argues that fears of diminished choice and service are overblown. The U.K. outlawed commissions on financial transactions for retail investors in 2010. The London financial district warned that thousands of jobs would be lost and that capital formation would slow to a crawl. "None of that happened," Brown says.

And small investors can get good automated advice now, Brown says. "Technology is the bridge to allow the industry to adapt to new rules. The current ones reflect antiquated business models that predate a lot of innovation. Not everything has to stay the way it was in the 1930s."

TIPS

The people who handle your money can charge in many different ways. But if your total fees are topping 2 percentage points a year, you're carrying a heavy burden.

•Know if you have an adviser or a broker. Advisers are generally obligated to find the lowest-cost investments for you.

•Ask if your adviser lowers fees as your account grows.

•Look for discounts. If you buy mutual funds through a broker, ask if he can get you lower commissions by staying in the same fund family or investing more.

•Compare performance.