The potential return of the fiduciary rule, which if passed would require more stringent regulations of financial advisers, received a mixed reception, with many in the financial services industry objecting to what it sees as “unnecessary” regulation.
The White House announced on Tuesday its latest proposal focused on retirement savings. The law, if passed, would lay down stricter rules for financial advisers and how they recommend investment products for retirement savers. The rule could also add IRAs to the protections instituted under ERISA, the federal law that oversees employer-sponsored retirement plans, like the 401(k) plan.
In its statement, the administration said the proposal would “close loopholes and require that financial advisers provide retirement advice in the best interest of the saver, rather than chasing the highest payday.”
The latest proposal is similar to the Obama administration’s fiduciary rule, officially known as the “Conflicts of Interest” rule, which was struck down in court during the Trump administration. With both proposals, the Biden and Obama administrations argued the rule could save retirement savers billions of dollars every year in unnecessary fees.
See: The White House says it wants to help retirement savers avoid billions of dollars in ‘junk fees’
Fans of the measure say retirement savers will be more protected.
“It’s time to update the nearly 50-year-old regulatory framework under the Employee Retirement Income Security Act of 1974 (ERISA) to prevent advisors from avoiding a fiduciary responsibility even when they are functioning as, and clients are relying on them as, trusted advisors,” the Certified Financial Planner Board of Standards said in a statement.
The CFP Board oversees certified financial planners, who are required to act as a fiduciary under the designation. “The outdated law does not prevent advisors from taking advantage of gaps in the regulations to steer their clients into high-cost, substandard investments that pay the advisor well but eat away at retirement investors’ nest eggs over time.”
The latest proposal would target the fees associated with conflicts of interest. “Junk fees,” Biden said in a press conference on Tuesday afternoon, are what people pay when they look for trusted advice that comes with hidden costs.
The Obama administration said conflicts of interest could amount to consumers spending as much as $17 billion a year. The White House specifically targeted annuities in its announcement Tuesday morning, saying conflicts of interest in advice for the sale of fixed index annuities alone could cost retirement savers “as much as $5 billion per year.”
Annuities in retirement accounts are supposed to work like pension plans, where they provide a fixed income year after year, Biden said during the conference. “But when the advice is self-serving, annuities drain people’s savings and deliver much less than expected.”
“I’m not saying all brokers, I’m saying some,” he added.
What the critics say
But critics disagree with the proposal and its intentions. In a statement, Jillian Froment, executive vice president and general counsel of the American Council of Life Insurers, a trade organization for the life insurance industry, argued annuities can be useful in retirement planning.
“Traditional pensions are no longer the norm, and guaranteed lifetime income through annuities lets people create their own pensions. That’s why annuity ownership is up,” she said in the ACLI statement.
Numerous other organizations came out against the proposal as well.
Many financial advisers, including broker-dealers, are already complying with the Securities and Exchange Commission’s Regulation Best Interest rule, which requires financial advisers to expose any conflicts of interest. Having too many rules may complicate matters.
“It is imperative that new regulations harmonize with Reg BI. Introducing more conflicting regulations would be unnecessary and could potentially hinder middle-class Americans’ ability to achieve a financially secure retirement,” said Dale Brown, president and chief executive officer of the Financial Services Institute, a trade organization for independent financial advisers and firms.
Also see: Fiduciary vs. financial adviser: What’s the difference?
Others said it was just a way to take more, and unnecessary, control.
“We struggle to see what the need is for more rule-making, as opposed to robust enforcement,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute, a retirement-focused association with members including life insurers, asset managers, law firms and broker-dealers.
Others say this will help clients find advisers to trust. AARP, for example, said in a statement this proposal would help clients feel secure in the advice they receive from financial advisers.
“People should be able to count on their financial advisors to provide sound advice that protects and grows their retirement assets, free of conflicts of interest,” Jo Ann Jenkins, chief executive officer of AARP, said in a statement. “A strong rule that closes loopholes in current law will help safeguard their hard-earned retirement funds.”
Biden’s latest fiduciary rule proposal has many critics — here’s why