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April 11, 2016

New Retirement Rules To Start in April 2017

The new retirement savings account rules announced by the Labor Department yesterday did not let individual investors out of their responsibility to oversee their savings and are not as harmful as some critics would make them out to be. Rather, the rules rightfully require that those giving recommendations about how to invest retirement savings put the interest of their clients first.
At the heart of the rule is the fiduciary standard. The fiduciary standard requires investment professionals to put the interests of the clients ahead of their own. As a holder of the Chartered Financial Analyst designation, I am required to “act for the benefit” of clients and place their interests before my employer’s or my own interests were I to give individualized investment advice. In contrast, the U.S. government’s existing regulations on retirement savings follow the suitability standard. The Securities and Exchange Commission (SEC) says that this standard simply holds that the broker, adviser or other financial professional has “a reasonable basis for believing that the recommendation is suitable for a client.” A variable annuity might be suitable for a new retiree rolling over his 401(k), but it wouldn’t be in his best interest if a lower-cost deferred or immediate annuity would work just as well.
I’ll discuss what the new rule covers. But first, I want to specifically address what it doesn’t do. It does not stop malfeasance or incompetence. If a broker, adviser or other financial professional is motivated to bend or break the rules, he or she is going to do so. Fortunately, the majority of financial advisers obey the rules. The bad news is that there are bad apples—as there are in many other industries—and many advisers who engage in misconduct are rehired as discuss in the April AAII Journal. As such, it is still your responsibility to check FINRA’s BrokerCheck, look at the SEC’s Form ADV, check with your state securities regulators and run a Google search on the adviser’s name.
You should also seek a second opinion before taking the advice of any financial adviser. It’s akin to medical recommendations. If a doctor advises getting back surgery, you’d likely seek out a second opinion, wouldn’t you? So why should financial advice be any different?
What the rule does cover is recommendations. The Labor Department defines a recommendation as a “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” The Labor Department adds that “the recommendation must be provided in exchange for a ‘fee or other compensation.’” Merely providing educational information is not enough.
Commissions will be allowed if a “Best Interest Contract Exemption” (also known as a BIC or a BICE) is issued. The BICE will allow for commission-based products such as annuities to continue being sold. Firms will be required to disclose fees, charges and conflicts of interest, but it will still be your responsibility to assess all costs (including surrender fees and other fees for getting out of the investment) as well as to shop around, say, for a lower-cost annuity contract. The same advice applies to life insurance policies, funds or any other proposed financial product.
The new rules will start to be implemented in April 2017 and will be fully effective on January 1, 2018. Note that these dates are after President Obama’s term ends. The next president may choose to alter or rescind the rules. Lawsuits challenging the new rules could still be filed as well. So, full implementation is not an absolute certainty.
Finally, there is the question as to whether you need a financial adviser or planner at all. The answer depends on you and your personal situation. A good adviser or planner can help you plan to achieve your goals and assist (or even manage) the complexities of your finances. About 30% of AAII members work with a financial adviser or planner.

It’s not necessary to work with one. If you feel comfortable managing your portfolio and your finances on your own, then keep doing so. I think the decision is akin to hiring a personal trainer. It’s possible to be very fit without a trainer, but some people find it helpful to hire one.
The Week Ahead

First-quarter earnings season will “officially” start with Alcoa’s (AA) release on Monday afternoon. Joining it will be approximately 15 other S&P 500 members, including Dow Jones industrial average component JPMorgan Chase & Co.(JPM) on Wednesday along with Bank of America Corp. (BAC), BlackRock (BLK) and Wells Fargo (WFC) on Thursday and Citigroup (C) on Friday.
The first economic report of note will be March import and export prices, released on Tuesday. Wednesday will feature the March Producer Price Index (PPI), March retail sales, February business inventories and the Federal Reserve’s periodic Beige Book. The March Consumer Price Index (CPI) will be released on Thursday. Friday will feature March industrial production and capacity utilization, the April Empire State manufacturing survey and the University of Michigan’s preliminary April consumer sentiment survey.
Several Federal Reserve officials will make public appearances: Dallas president Rob Kaplan on Monday; Philadelphia president Patrick Harper, San Francisco president John Williams and Richmond president Jeffrey Lacker on Tuesday; Atlanta president Dennis Lockhart and Governor Jerome Powell on Thursday; and Chicago president Charles Evans on Friday.
The Treasury Department will auction $24 billion of three-year notes on Tuesday, $20 billion of 10-year notes on Wednesday and $12 billion of 30-year bonds on Thursday.
About The Author - Charles Rotblut, CFA is the VP and Editor for American Association of Individual Investors (AAII). Charles is also the author of Better Good than Lucky. (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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