The regulatory burden on financial advisers is mounting as various government agencies parse the fine points of the Dodd-Frank financial reforms and develop new rules. In addition to the fundamental issues of who should regulate financial advisers and whether advisers and broker-dealers should operate under the same standard, other rules that could affect the livelihood of financial professionals are close to becoming reality.
SAY IT PLAIN One change for advisers comes March 31, when the Securities and Exchange Commission will require advisers to provide clients with plain-English descriptions of their investment philosophies, fee schedules and conflicts of interest on Form ADV Part 2.
The change is intended to make it easier for clients to compare advisers' services and business models. Consultants and lawyers who specialize in turning legalese into understandable prose said they have been inundated with calls from advisers seeking help with a translation task that many said is harder than expected.
WHAT DOES IT COST? Late this year, retirement plans must start complying with rules issued by the Labor Department in October requiring that 401(k) plan participants be given more information about the fees and other expenses associated with their retirement plan.
The rules, which also require that participants receive more information about their plan investment options, are applicable to plans whose fiscal year begins on or after Nov. 1; calendar year plans must comply by Jan. 1.
Lawyers who specialize in the Employee Retirement Income Security Act of 1974 expect a rise in complaints as participants learn about costs they didn't know they were paying.
The new disclosure requirements will allow participants to compare different investment products directly and show how much they pay in fees to the 401(k) provider. Specifically, they must show one-, five- and 10-year returns for investment options such as mutual funds that don't have a fixed rate of return.
FIGHTING FOR RETIREES On the fiduciary front, the Labor Department is still poring over comment letters on its proposed rule to broaden its definition of the term in connection with retirement plans.
It extended until Feb. 3 the deadline to file comments on its proposal, which would consider anyone providing investment advice to a retirement plan or its participants for a fee or other compensation a fiduciary.
The department is planning a public hearing in Washington for March 1-2 at which interested parties each will have 10 minutes to present thoughts on the proposal.
The rule was proposed in October to update a 1975 federal regulation that agency officials think limits the department's ability to protect plan participants from potential conflicts of interest.
The expansion of the “fiduciary” definition threatens to shake brokers and agents out of the retirement plan market and tilt the business toward registered investment advisers.
“I think there will be an amended regulation that broadens the definition of a fiduciary, but by how much is unclear,” said Fred Reish, a principal at the law firm Reish & Reicher. “As it is proposed now, it takes broker-dealers out of the 401(k) business.”
Another concern of advisers and brokers is the consideration of including as fiduciaries any adviser or provider who counsels retiring workers about rolling over their 401(k) funds into individual retirement accounts.
More than $1.5 trillion will roll over into IRAs over the next five years, according to McKinsey & Co. data.
REVEALING PROPOSAL The Labor Department also has proposed rules that would require more disclosure of target date investments, which reset their asset allocations over time.
The financial crisis of 2008 highlighted the variability among funds with the same target dates. Funds with a 2010 target date posted losses ranging from 9% to 41%, with the average fund losing 24%, according to the SEC.
Assets in target date funds swelled to more than $270 billion as of last year after the Labor Department designated them a qualified default investment, meaning that employers are protected from liability when investing a worker's contributions in a target date fund if that employee hasn't designated another investment choice.
Both the Labor Department and the SEC, which proposed its own regulations for target date funds, want fund companies to tell investors that they can lose money in target date funds.
Such disclosure wouldn't be fair, according to The Spark Institute Inc., which represents retirement plan service providers, because it could create “a potentially negative perception of target date funds in comparison to other plan investment options,” Larry Goldbrum, the group's general counsel, wrote in a comment letter filed with the Labor Department.
The department and the SEC issued a joint investor alert in May explaining the aspects that should be considered before investing in such funds.
FIGHTING OFF THE TAX MAN The Financial Planning Association has its members on high alert for tax initiatives that could target the financial services industry at the state level.
Last year, lawmakers in California and Florida sought to impose a sales tax on services and a transaction tax on securities. This year could be worse, the FPA said.
“States are in dire shape,” said Phillips Hinch, its assistant director for government relations. “It's clear they'll be looking for revenues anywhere they can get them.”
E-mail Liz Skinner at [email protected].
