By Zachary Laubernds,
Money & Investing Writer
New sweeping rules, regarding the professional advice given to those saving for retirement, were announced on Wednesday by the United States Labor Department.
Referred to by many as the “fiduciary rule” has been long-awaited by those in the middle class. The rules being implemented are designed to hold financial advisers and consultants responsible for guidance given to clients.
With the new rules, these financial experts will be legally required to put their clients first. The current regulations in place only require financial experts to direct their clients towards “suitable” investment options.
That leaves a lot of room for interpretation. With the new regulations advisors and consultants will be required to direct clients toward investment options that best suit the client and not the adviser.
These new restrictions also seek to limit conflicts of interest within the personal investment industry. The current guidelines do nothing to decrease conflicts of interest, such as mutual funds paying fees to advisers that direct investors toward their funds.
Moreover these new regulations are being introduced to protect the everyday investor; the blue collar worker that hasn’t sat through a semester of Money and Banking.
That’s not saying that those of us who have are better suited to do our own investing.
It’s just another level of protection for those whose top priorities down run across the ticker on the fifth floor of Jubilee Hall.
Thomas Perez, Secretary of the Labor Department, even said “This is a huge win for the middle class,” That’s exactly what these new rules are set to do; protect the 99 percent.
According to the White House, complicated investment advice costs Americans $17 billion a year.
That being said, there are still mixed reactions to the announcement. Some worry that the new rules could cause issues for investment firms and the market as a whole in the long run.
If advisers are legally required to steer less informed investors towards less expensive and less complicated investments, the demand for those types of investments is going to decline dramatically.
Using the simple law of supply and demand, if demand declines, supply will as well. With a lower supply of higher priced and more complicatedly structured investments, those interested in those options will face even higher prices.
Several experts fear that this could result in market volatility, while others argue that a simpler market will be better for all investors.
What effect will this have on personal investment firms though?
Well, many have argued that so long as advisers hold themselves to fiduciary standards already, there won’t be much of an effect.
Those firms that rely on commission could experience a shake-up though and may believe that many of those firms will move away from commission based pay and adopt a fee-based alternative.
This introduces another issue though. Some are arguing that a fee based system will prove to be more expensive for investors that are less active, because they will be paying a set fee no matter the return they receive.
In contrast, the Department of Labor has predicted that these new regulations could save investors up to $40 billion in fees over the next 10 years.
The new regulations are set to roll out in the next few months. Only then will we be able to analyze the real effects.
A version of this article appeared in the Tuesday, April 12th print edition.
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