In recent weeks, the Biden Administration has led a clampdown on ‘junk fees’ on items ranging from concert tickets to airfares. The Federal Trade Commission proposed a rule that would ban businesses from advertising pricing that hides or leaves out mandatory fees. It would also require sellers to disclose the amount and purpose of fees upfront and state whether they are refundable.
"Folks are...tired of being taken advantage of, and being played for suckers," said President Joe Biden during an appearance outside the White House.
Now, the Biden administration has set its crosshairs on the retirement advice industry. The Department of Labor, under Biden's direction, has proposed a new rule that aims to close loopholes in retirement financial advising. The goal is to ensure that financial advisors prioritize their clients' interests, maximizing their savings and investments rather than their own bottom line.
Brokers’ Conflict Of Interest
According to Biden, while most financial advisors give good advice at a fair price and are honest with their clients, there are exceptions. Some advisors and brokers guide their clients towards certain investments, not because they are the best for the client, but because they generate the most profits for the broker. The new rule is intended to address these issues.
Financial advisors are typically compensated by either a direct payment from the saver (or employer in the case of 401(k) plan advisors) or a commission from the firm producing the investment product they recommend. The White House argues that advisors receiving commissions, commonly known as brokers, may experience a conflict of interest when they receive higher compensation for recommending specific products that could generate lower returns for savers.
The problem arises when the investment or insurance product recommended is influenced by the financial incentives that financial institutions put in place and not by what the customer truly needs. The administration maintains that when consumers receive financial advice and purchase investment products, these products must be in their best interest.
Best Interest Standard
The proposed rule is broad in its coverage, encompassing non-securities like fixed indexed annuities, fiduciary advice, and one-time transaction advice for actions such as 401(k) rollovers. It also aims to update the definition of an "investment advice fiduciary." This is meant to ensure financial advisors adhere to high standards of care and loyalty.
Advisors who breach their fiduciary duty could face severe consequences under the new rule. These could include having to pay restitution and additional financial penalties.
The rule, if implemented, could be a significant step forward in ensuring that retirement savers receive advice that is in their best interests. However, critics of the proposal, such as the Competitive Enterprise Institute, argue that the rule could come with adverse effects, such as limiting access to advice and causing certain fees to increase.
Regardless, the proposed rule signifies the administration's desire for increased oversight to protect consumers from hidden fees and conflicts of interest in the retirement advice industry. As the war on 'junk fees' continues, it remains to be seen how far-reaching the impact of these measures will be if implemented.
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This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.