Proposed regulations that restrict how financial advisers can work with company retirement plans could send brokers advising small businesses scuttling out of the market.
Regulations released by the U.S. Labor Department earlier this month are designed to ensure that company retirement plans, including 401(k)s and IRAs, receive unbiased advice. The proposed changes are open for public comment until May 5.
Brokers, who by law cannot provide advice, are expected to give up many of these assignments — and this could create a problem for small companies in particular.
"I've seen bad publicity about (commission brokers) being riddled with conflict, so they shouldn't be in the market. But who will that leave to do this business?" said Jason Roberts of Los Angeles law firm Reish & Reicher. Investment advisers "are not coming into the $1 million space."
The DOL estimates the new rules will affect 16,000 firms that advise on retirement plans and more than 83,000 defined contribution pension plans, such as 401(k)s.
Under the new rules, regulators will monitor plans to ensure that only those advisers who receive a set fee can provide advice to employees on investments. Brokers can only "educate" plan participants on their options available.
If an adviser receives a fee or commission based on the kinds of investments selected by employees, he must use an unbiased computer model to make investment recommendations. This is designed to prevent advisers from steering people into investments that are more profitable for themselves.
Advisers also can operate in the lucrative $2.7 trillion retirement savings market if they act as a fiduciary and charge a set fee no matter which investments are included.
The regulations do not spell the end for commission brokers in the retirement plan business, said Marcia Wagner of the Boston-based Wagner Law Group.
"But they have to learn and love the distinction between education and advice," she said. "They have to make it clear they're brokers who make money on commissions and can't render investment advice."
Commission-based advisers still can play a valuable role in the retirement plan area, said Roberts. These advisers often oversee smaller plans of under $5 million that independent advisers consider too small.
Brokers see smaller plans as an entree into a company where they can prospect for new clients among top executives. It also gives them a chance to help retirees roll over their plan assets into an IRA.
Fee-based advisers are restricted by their fiduciary role from cross-selling products and profiting from rollovers.
Moss Kaufman, president of Smithtown, New York-based Network Capital, an investment advisory firm that manages more than $50 million in clients' assets, said the proposed rules will hurt his small 401(k) plan practice.
Kaufman's firm oversees a handful of retirement plans for companies owned by clients, but does not act as a fiduciary. The rules "would reduce our ability to properly advise our clients despite our long relationships of trust," he said.
Regulators need to focus on disclosing information about plan costs and the value an adviser adds, rather than getting hung up on how advisers are compensated, said Kaufman.
One solution could be to leave retirement plans to advisers who focus on this area, said Rich Lynch, chief operating officer of fiduciary 360, a Pittsburgh firm that trains advisers. They could then make this business feasible by advising on a large number of plans, he said.
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