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New Rule for Retirement Advice: What You Need to Know

The Department of Labor’s new fiduciary rule directed at altering the way the financial industry delivers retirement savings advice stirred a string of reactions from brokerages, mutual fund companies, analysts as well as politicians. The long-awaited rule that came with some positive concessions from an earlier proposal was considered “lenient” and largely welcomed by the industry.

The rule, which will likely impact the way Americans save for retirement, is intended to reduce billions of dollars in fees paid annually by small savers, who transfer money from corporate retirement plans like 401(k)s to their individual retirement accounts. The purpose is to protect middle-class families from bad retirement advice by requiring retirement brokers and advisers to put their clients’ best interest before their own profits.

The previous fiduciary standard required brokers’ recommendations to be “suitable” for investors and not necessarily the best one. Advisers took advantage of this loophole by selling high-fee products to earn more commissions. However, the new rule, which will take full effect on Jan 1, 2018, will change that.

“Today’s rule ensures putting the clients first is no longer a marketing slogan,” said Labor Secretary Thomas Perez while announcing the final rule on Wednesday at the Center for American Progress. “It’s now the law.”


The initial proposal would have been a blow to firms like LPL Financial Holdings Inc. LPLA and Primerica, Inc. PRI since they sell commission generating investments. However, the weaker-than-expected final rule permits commissions, given the brokers divulge conflicts of interest and put clients’ best interests first.

Moreover, the new rule does not prevent brokers from recommending proprietary products, sharing revenue with creators of promoted funds or suggesting risky, high-fee investments in alternative assets and certain annuities.

Thus, the announcement of the final rule resulted in higher share prices of both LPL Financial and Primerica. Gains were also recorded in the share prices of other investment management and brokerage firms including Ameriprise Financial, Inc. AMP and Stifel Financial Corp. SF.

In further relaxation, firms received more time to implement the costly and difficult revisions compared to the earlier eight-month compliance deadline. With the new rule expected to push more IRA accounts into fee-based structures, firms that provide low-cost index and exchange-traded funds like BlackRock, Inc. BLK and The Charles Schwab Corporation SCHW will surely benefit.

Road Ahead

Large banks with wealth management units like Bank of America Corporation BAC, Morgan Stanley MS and JPMorgan Chase & Co. JPM have extensive resources to adapt to the new rule. However, some independent brokerages will not have the same advantage.

According to Michael Wong, an analyst at Morningstar, some firms may have to build different product lines for retirement accounts compared with taxable ones in order to comply with the rule. Also, firms may have to form separate share classes for IRAs. Similarly, the firms may have to transform the way advisers are compensated and put in additional resources to adapt to the new rule.

Therefore, though the new rule is not as stringent as expected, the compliance road will not be a cakewalk for every firm.

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JPMORGAN CHASE (JPM): Free Stock Analysis Report
BANK OF AMER CP (BAC): Free Stock Analysis Report
PRIMERICA INC (PRI): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
SCHWAB(CHAS) (SCHW): Free Stock Analysis Report
STIFEL FINL (SF): Free Stock Analysis Report
LPL FINL HLDGS (LPLA): Free Stock Analysis Report
AMERIPRISE FINL (AMP): Free Stock Analysis Report
BLACKROCK INC (BLK): Free Stock Analysis Report
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