The federal government has proposed tightening some rules that affect financial advisors who handle retirement planning for their services, including advisors who work with clients on Self-Directed IRAs, Self-Directed 401(k)s, and other retirement accounts.
The new rules would attempt to reduce conflicts of interest on the part of advisors, and make it more difficult for advisors to avoid fiduciary responsibility toward their clients, or to recommend sub-optimal investment options when better investments are available, simply because the inferior investment pays the advisor or his or her firm more money.
The Department of Labor cites a February 2015 White House study, The Effects of Conflicted Investment Advice on Retirement Savings.
The authors of the report list the following findings:
- Conflicted retirement investing advice leads to large and economically meaningful costs for Americans’ retirement savings.
- Conflicted retirement advice leads to inferior returns – by about 1 percentage point per year.
- Financial advisors have channeled $1.7 trillion of investors wealth into inappropriate investments that only meet a ‘suitability’ standard – a much lower standard than that of a fiduciary, which is the highest duty of care recognized under the law.
According to the Department of Labor, the new rules would require that broker and advisor recommendations for retirement account savings be in the best interests of the client, and not the broker or the investment firm.
“This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest,” said Secretary of Labor Thomas E. Perez. “As commonsense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace. Our proposed rule would change that. Under the proposed rule, retirement advisers can be paid in various ways, as long as they are willing to put their customers’ best interest first.”
From the Department of Labor’s FAQ page on the topic: “Today large loopholes in the current rule’s definition of retirement investment advice make it hard for middle-class families, and especially IRA owners, to know who they can trust to give them advice that is in their best interest. Under the proposed rule, an individual is a fiduciary if the person receives compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant, or IRA owner for consideration in making a retirement investment decision. Such decisions can include, but are not limited to, what assets to purchase or sell and whether to rollover from an employer-based plan to an IRA. The fiduciary can be a broker, registered investment adviser or other type of adviser (together referred to as “advisers”), some of which are subject to federal securities laws and some of which are not.”
You can find more information, including an explanatory video at this site.
Implications for Self-Directed IRA investors
The White House report is discouraging, but not surprising. Traditional brokers from run-of-the-mill broker-dealers and investment houses have historically and repeatedly landed in hot water over conflicted investment advice, including the scandals over sell-side investment research of the early 2000s that put then New York Attorney General Elliot Spitzer in the public eye. For the first, time, anyway.
These issues underscore the value of self-direction. Our clients have taken on more direct responsibility for their own retirement accounts, and have in many ways declared independence from Wall Street’s army of brokers and advisors – at least for the self-directed portion of their accounts.
American IRA, LLC is a leader in self-directed retirement account administration. We are experts on handling transactions within IRAs and other self-directed retirement accounts. Our low ‘flat fee’ expenses minimize conflicts of interest, are easy to understand, and keep more retirement money working for you, rather than sneaking into a broker’s pocket.
To learn more, call us at 866-7500-IRA (472), or visit us online at www.americanira.com.