Clients must come first: Labor Department raises standard that brokers will use to help retirement savers

By Russell Hubbard and Steve Jordon / World-Herald staff writers

Omaha investor Amish Gangar said he knows that some investment professionals are jamming their clients with hidden fees, backdoor commissions and other conflicts of interest that will be remedied by new U.S. Labor Department rules issued Wednesday.

“When I talk to my friends and look at their portfolios, I’ve seen a lot of abuses that occur,” said Gangar, a local software developer and experienced investor who manages his own money. “The financial manager is not really putting them into the most cost-effective mutual fund.”

In addition, Gangar said most people he knows and helps with the basics of personal finance don’t realize what a big chunk of their portfolio is going into the pockets of investment advisers and into the investment and mutual funds themselves.

The new rules, issued after six years of debate, are designed to stop all that, make all advisers act in their clients’ best interest and disclose all hidden fees and backdoor payments that can be part of the relationship between Main Street advisers and Wall Street investment companies.

Basically, the problem is that the investment fund your adviser recommends might be owned by a big company that is paying the adviser a commission in return for the recommendation. Or in other cases, the mutual fund that a broker is touting is owned and operated by an affiliate of the brokerage.

Until now, the standard that applied to many investment professionals advising people on retirement saving was the “suitability standard.”

That means the adviser’s recommendations only had to be reasonable given the customer’s income, age and investment objectives. Critics say this encouraged excessive fees, exotic investment products that can be hard to unwind and the sale of investments peddled by companies that paid a commission back to the adviser.

A lot of money has been moved from investment to investment, subject only to the suitability standard; 401(k) transfers alone generate billions in fees per year to investment advisers who counsel people moving money into IRAs. While some transfer fees are unavoidable, what most people don’t know is that IRA sales reps often earn more money from selling certain investments over others. But as long as their recommendations were “suitable” — no harm, no foul.

[Read more: As retirement plans turned self-guided, investment advice turned more crucial]

That is out the door now.

The new Labor Department standard is far more rigorous, called the “fiduciary standard.”

That means investment professionals advising people on retirement must put the customer’s needs above their own, even to the detriment of their own incomes, not simply recommend suitable investments. Investment advisers registered with the Securities and Exchange Commission already are held to the fiduciary standard.

The point: what the Labor Department calls complete transparency.

The Labor Department might seem a strange choice to be involved in the investment industry, but it already is, via its oversight of employer-funded pensions governed by the Employee Retirement Income Security Act. That’s why the new rules apply only to retirement-oriented accounts such as 401(k) plans, IRAs, and company and public-funded pension plans.

“With the finalization of this rule, we are putting a fundamental protection into the American retirement landscape,” Labor Secretary Thomas Perez said Wednesday. “A consumer’s best interest must now come before an adviser’s financial interest. This is a huge win for the middle class.”

Omaha attorney Scott Berryman, whose practice includes estate planning, said some of his clients are surprised to learn about the suitability standard and about how less rigorous it is than the fiduciary standard.

“Knowing that somebody is a fiduciary and has (the client’s) own interests at heart — I think the public is really going to respond to that,” Berryman said. “People are really surprised that there’s a lower standard, something that might lead to hidden fees or selling them into a product that is really great for the adviser’s commission, really great for the brokerage and just suitable for the customer.”

As for brokers who insist that their recommendations already meet the higher standard?

“I wish all of their brethren were so altruistic,” Berryman said.

Cella Quinn, owner of Omaha’s Cella Quinn Investment Services, said she isn’t sold on the change.

“It is just regulation at its worst,” said Quinn, who has $204 million under management. “I’m really concerned about the small investors.”

She’s not alone. Critics have said that professional advisers will begin turning away small accounts, such as modest 401(k) rollovers and the like, seeing such transactions as not worth the cost and bother.

“What actually happens six months from now can be quite different from what’s being talked about now,” Quinn said. “I think we don’t have any idea what the final result is going to be.”

Still, Wall Street isn’t waiting around. Many big broker-dealers and money managers already have begun adapting.

Omaha-based Securities America, one of the nation’s largest broker-dealers with $55 billion under supervision, has 18 people assigned to implementing the new rules, and the company’s outside lawyers also are on the case, spokeswoman Natalie Hadley said.

“We anticipate spending a significant amount of resources to adapt our systems, to educate and train our advisers, and to help our advisers educate their clients,” Hadley said.

It won’t be free.

Dan Tobin is the senior vice president of risk management at Omaha’s Carson Wealth Management, which has about $6 billion under advisement. He said there will be some additional costs for wealth managers from operational expenses associated with the new rules and from additional expenses incurred by investment funds.

“But overall, we fully support it,” Tobin said.

He said most Carson Wealth business already is conducted on a fee-only basis, so conflicts of interest based on hidden commissions aren’t an issue.

The new standard “levels the playing field,” he said. “The big winners here are the clients.”

Still, the topic is a sensitive one for some brokers who already have high personal and business standards and consider themselves to be family confidants, professionals on an ethical par with doctors and lawyers.

One Omaha broker said privately that he has been working in the best interests of his clients for 30 years, without any prompting from anyone.

“I don’t need the Department of Labor to tell me that,” the broker said.

Contact the writer: 402-444-3197,

* * *

New rules for retirement account investment advisers:
Old standard: Investments are broadly suitable for a client’s age, income and investment objectives. Broker-dealers, insurance sales people and some other financial company representatives learn clients’ situations and use the “suitability standard.”

New standard: Advisers must operate as a “fiduciary,” recommending investments in the clients’ best interests even if commissions are lower. They must provide full and fair disclosure, avoid conflicts of interest and disclose and manage unavoidable conflicts in the client’s favor. Registered Investment Advisors and some other advisers already operate under the fiduciary standard.

Area affected: Advice for retirement accounts such as 401(k)s and IRAs.

Pros: Greater transparency for investors so they understand what they pay for advice, and possibly lower expenses and greater long-term retirement earnings.

Con: Some advisers might shy away from small accounts, leaving them open to mistakes or discouraging investment savings.

Schedule: Phase-in starts about a year from now, with full compliance by January 2018.

Source: Chamberlain Fiduciary Consultants

Omaha World Herald

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