Tags: Obama | Brokers | Best Interest | Trial Lawyers

Obama Set to Require Brokers Act in 'Best Interest,' Boon to Trial Lawyers

Obama Set to Require Brokers Act in 'Best Interest,' Boon to Trial Lawyers

By    |   Tuesday, 15 March 2016 07:52 AM


President Barack Obama is about to unveil stricter rules governing brokers and others who help people invest their retirement savings as the administration intends to keep tightening rules on the financial industry.

The administration wants to impose a legally enforceable duty to act in the “best interest” of clients, similar to the fiduciary duty lawyers and other professionals already owe.

Brokers now are required only to offer investments that fit a client’s needs and risk tolerance at the time of sale. Supporters say it would ensure that they act in the best interests of their clients.

But critics, including in the investment industry, say the rule would raise costs and discourage those who need investment advice the most from seeking it.

Under the Labor Department’s proposed rule, brokers could earn sales commissions and other income if they sign a “best-interest” contract with investors to disclose fees and incentives that might influence recommendations.

The administration says the “fiduciary rule” is necessary for two reasons, according to the Washington Post: First, Americans’ retirement funds reside heavily in individual tax-advantaged accounts such as 401(k)s and IRAs, the former accounting for $4.2 trillion and the latter $7.4 trillion in 2013. Yet federal regulations date from 1975, when corporate pensions predominated. Second, many financial advisers to IRA investors get paid commissions based on sales of certain products that may not be best for their clients, yet those compensation schemes are not always transparent.

A White House study suggests “conflicted advice,” allegedly particularly prevalent in the half-trillion-dollar-a-year 401(k) rollover business, costs consumers $17 billion in higher fees per year.

Opponents do not deny that commission-based compensation schemes can create apparent conflicts of interest, but advisers are still required to act based on what’s “suitable” for a client.

The proposed regulation, they argue, will render unprofitable commission-based business models that are the only way many small savers get investment advice now, and the costs of that would outweigh the costs, if any, of the status quo.

The Washington Post agrees there is no perfect solution to the problem, and there is likely to be collateral damage on both sides of the issue

“We revert to common sense: If you’re in business to advise small investors, it should be as clear as possible that you work for them and not a third party behind the scenes,” the newspaper said in a column entitled The Post’s View.

“Yes, the fiduciary rule might shrink the business, but what remains could well enjoy greater legitimacy, in both reality and perception. In this time of raging populism, the financial industry needs all the trustworthiness it can get.”

Meanwhile, Newsmax Finance Insider John Berlau warns that the looming regulation could impose new regulations on talk show hosts who offer advice to individual audience members. Under the proposed rule, investment tips pertaining to an individual's specific situation may be construed as fiduciary advice.

“But the potential chilling effect of this rule on free financial discussion in the media is even more frightening,” Berlau explained for Forbes.

“Under the proposed regulation, investment advice from a radio host to a caller regarding the caller’s own investment issues would appear to be fiduciary advice if the advice addresses specific investments,” Kent Mason, a partner at the law firm Davis & Harman who has testified before Congress on the ill effects of the fiduciary rule, wrote in an email to Berlau.

(Newsmax wire services contributed to this report).

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President Barack Obama is about to unveil stricter rules governing brokers and others who help people invest their retirement savings as the administration intends to keep tightening rules on the financial industry.
Obama, Brokers, Best Interest, Trial Lawyers
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2016-52-15
Tuesday, 15 March 2016 07:52 AM
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