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Why Protecting Access to Retirement Advice Matters

In early 2015, the U.S. Department of Labor (DOL) is expected to repropose a regulation to change the definition of fiduciary under the Employee Retirement Income Security Act. The change would have the practical effect of limiting retirement advice for many 401(k) and IRA investors.

What are the prospective negative consequences of the regulation?

Many people planning for retirement work with financial professionals. Today, customers can choose between financial professionals who charge commissions on the products that he or she sells, or use financial professionals who charge fees based on customers’ total assets or by annual retainers, hourly fees or flat fees for investment advice or products. These various arrangements enable investors to have the most choice when determining what works best for them.

Generally speaking, financial professionals at broker-dealer firms are paid on a commission basis and financial professionals at investment adviser firms are paid on a fee-basis. Many middle-income investors choose the commission-based model because it is attractive from a cost-value perspective. In fact, according to a 2011 study, “98 percent of investor accounts with less than $25,000 were in brokerage relationships.”

The DOL’s expected reproposal would favor one business model over the other, which would effectively preclude broker-dealers from servicing their customers’ IRA accounts. Many modest investors, which make-up the vast majority of IRA investors, would not be able to hire financial professionals if their account balance is too small or would not be able to afford the fees. The result: many middle class investors would have retirement accounts with no assistance from financial professionals at all, which would limit their choice and reduce their access to education.

Advice from financial professionals is vital — and the expected reproposal from the DOL would limit access to it for many Americans.

Has another country enacted a similar regulation?

To see how people may be affected, it is best to see what happened when a similar rule was enacted in the United Kingdom. In January 2013, the United Kingdom’s Financial Conduct Authority (FCA) issued a similar investment information rule. By December 2013, the total number of advisors declined by 11 percent according to the FCA. Additionally, the regulations impoised fees to set up financial plans for some customers and priced out 60,000 clients from access to financial guidance.