NEW YORK, Sept 22 (Reuters) - The Labor Department is likely to stick with a plan that could restrict brokers who provide IRA account advice from charging commissions.
The controversial proposal is meant to further the role of advisers as fiduciaries who must put clients’ interests first.
Despite withdrawal of its initial proposal last week, the government is likely to retain that higher standard for advice on individual retirement accounts when it reproposes the rules early next year, a Labor Department spokesman told Reuters.
The provision is expected in a broader proposal aimed at updating the definition of a "fiduciary" under a federal law that regulates retirement plan advisers.
Right now, securities industry rules require brokers to recommend investments that are suitable, based on criteria such as a client's age or risk tolerance. The expected proposal, however, would require a higher fiduciary standard to be extended to IRA investment advice. That could mean drastic changes to compensation for brokers and restricted access to IRA advice for small investors, critics say.
The Labor Department, which has jurisdiction over retirement plans, is simply trying to protect retirement plan and IRA investors from "abusive practices and conflicted advice," while preserving certain fee practices, Borzi said in a statement.
Even so, brokers and consumer advocates say the higher standard creates some problems. Brokerages often collect commissions on trades made in IRA accounts widely used by small investors. The new proposal could restrict brokerages who provide IRA advice from charging commissions if it requires them to act in their clients' best interest for those accounts, say industry and consumer groups.
Nothing in the current suitability standard prohibits advisers from recommending products that pay higher commissions than others. The fiduciary standard in the recent Labor Department proposal would require extensive disclosure of that information, if commissions are charged.
The controversial proposal is aimed to update a piece of the 1974 Employee Retirement Income Securities Act, (ERISA), a law developed to set standards for retirement plans in private industry, such as 401(k)s. It also allows investors in those plans to sue for fiduciary violations by the plan's adviser.
Advice about IRAs is not included in the Labor Department's current definition of "fiduciary."
Securities industry and insurance groups criticized the original proposal saying a fiduciary standard of care could force many IRA investors to move to advisers who charge a flat annual fee -- usually a percentage of total assets -- for advice. The "fee-based" option can be more expensive for investors, they say.
Other groups representing pensions and retirement plans also raised concerns about increased liability and costs.
A Labor Department revision could be more palatable to brokerages and their clients if exemptions or clarifications are added to the proposal.
For example, the Labor Department could exempt IRAs that don't meet minimum investment requirements for fee-based programs.
A fiduciary standard could, say, apply to advisers who sell IRAs as a one-shot deal -- which can be common because of the prevalence of rollovers in IRAs from 401(k) plans -- but not those who provide regular advice to their clients, says Marcia Wagner, an employee benefits lawyer who heads The Wagner Law Group P.C. in Boston.
Regulating the entire vast market would be impractical, she said. There are about 19 million IRA account holders in the U.S. and the average account is worth about $28,000, according to the Financial Services Institute, a trade group representing independent-broker dealers.
The exemption idea has garnered an unusual ally for the securities industry: the Consumer Federation of America, an advocacy group that seeks better protection for investors.
But Barbara Roper, investor protection director for the group, says the federation favors certain exemptions to the fiduciary standard. Without them, she says, retirement advice might become inaccessible to middle market investors because brokers who couldn't charge commissions will walk away.
Middle income customers often invest as little as $2,000 per year, making their accounts barely profitable for brokerages, Roper says.
"That's just not a big enough amount for brokers to take on if they can't charge commissions," she says.
(Reporting by Suzanne Barlyn; Editing by Jennifer Merritt and Walden Siew)
© 2010 Thomson Reuters. Click for Restrictions.
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