If you are still unaware of the Department of Labor (DOL) ruling that was implemented last year, you need to get to grips before you end up on the wrong side of the law. Keeping that in mind, in this post we are going to give you a full overview of the new government rule, which sees investors come first so that you are fully aware of what this means for your business.
New Department of Labor Rules
The new DOL ruling was actually first proposed in 2010, and it imposes new fiduciary obligations regarding financial advisors and individual retirement accounts. The reason why it has taken so long for the new law to be imposed is that the two earlier proposals were not workable, and far too complicated.
Considering that there is more than $10 trillion worth of assets held in retirement accounts that come under this new rule, it is not hard to see that this is going to have a big impact on the industry. In basic terms, the government has taken this step to make sure that financial advisory practices put their clients’ needs first and that they always act in their best interest.
Thomas Perez, the former Secretary of Labor, revealed that this is a massive win for the middle class. He states that while there are a lot of firms that claim they put the interests of their clients first, this is now law – not just an advertising slogan. He also believes that the industry should have no trouble complying with the new rules, which applies to everything from investing in stocks to advising on real estate. The changes that are being enforced reduce disclosure requirements on advisors while also making it easier to draft the new best-interests contracts, and thus there are advantages for financial advisory firms as well.
Employee Retirement Income Secuirty Act
It marks the first big change in four decades to the Employee Retirement Income Security Act law, and, as you may have guessed, there has been a lot of resistance to it. Businesses in the asset management and brokerage sector have expressed their intense opposition to the new rule, but their opinion won’t matter, as the law is set to go ahead.
Despite the fact that the new rule does not apply to all investments, a lot of industry experts believe that this is only going to be the beginning of sweeping changes that will impact the financial services sector. In an attempt to protect the public from firms that deliberately mislead them, the government may be tempted to implement similar rules across all types of investments once this law has been properly enforced.
The impact DOL new ruling will have on financial advisors
The fiduciary standard is designed to ensure financial advisors operate with their clients’ best interests in mind with regards to retirement plan accounts. In this section, we take an in-depth look at the impact this law will have on financial advisors.
The new ruling means that all financial advisors need to disclose every potential conflict of interest to all of their investment clients, and ensure they source the best product for their clients no matter the situation. As a result, it is highly likely that this could be the end of the suitability standard as we know it.
It is likely that this new regulation will have an effect on the economics of advisory businesses, particularly in certain channels. Experts believe it will increase compliance costs and hurt revenue. Of course, this all depends on how honest the advisory firm in question is being at the moment, as this impacts how much of their firm they need to adapt to suit the new regulations.
In addition to this, research published in Investment News revealed that 35 per cent of brokers are probably going to stop servicing low-account balance IRAs. Moreover, the survey they conducted revealed that a large portion of assets would be moved into cheaper investment products from high-commission investment products.
It was also revealed that financial advisors will increase the use of actively managed ETFs, passively managed exchange-traded funds, and separately managed accounts by about 16 to 30 percent. On the other hand, the use of private placements will fall by 37 percent, and the utilization of non-traded real estate investment trusts will also drop by 45 percent. 57 percent of those surveyed also said they intended to utilize variable annuities on a lower scale with regard to retirement accounts.
We will also see companies take steps to improve their service to ensure they are operating transparently. At a very minimum, all businesses will need to have a central digital platform for clients to use, allowing them to view their investments and to manage their accounts. Additionally, companies have already started to modify advertising messages, re-tool products, and adjust their fees.
It is also likely that the new DOL rule spells good news for millennial advisors. A lot of young people are put off joining the financial advisory sector because of the commissions-based model used. However, it is likely that a lot of businesses will now move towards a set salary compensation model for advisors in light of the new law.
Last but not least, it is important to point out that firms operating in an honest manner at present will, of course, benefit. Those who are fed up with the opaque nature of financial advice, which makes it difficult for them to compete, will be some of the biggest winners.
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