PITTSBURGH -- Financial adviser Robert Fragasso traveled to Washington last year to lobby Congress to vote against the Labor Department's plan to impose a fiduciary standard on all investment advisers who handle individual retirement plans.
"I have a problem with the Department of Labor requiring investment people to act as a fiduciary," said Fragasso, who is chairman and chief executive of Fragasso Financial Advisors and a member of the Financial Services Institute's legislative committee.
A fiduciary is expected to give a closer look into whether an investment is appropriate for a particular client.
"You can't just wave a magic wand and sprinkle pixie dust and make a fiduciary. It requires education and experience, not just a guidebook."
The Labor Department is trying to better protect consumers who have entrusted their retirement assets to advisers. The goal is to discontinue some abuses and deceptive practices, such as recommending investments that will generate the highest commission for the adviser and excessive trading on a client's account.
With so many baby boomers leaving the workforce, the amount of money being transferred from company 401(k) plans to IRAs and other investment accounts that will be handled by financial advisers is substantial. Total U.S. retirement assets reached $24.9 trillion as of March 31, according to the Washington-based Investment Company Institute. Assets in individual retirement accounts alone totaled $7.6 trillion at the end of the first quarter this year.
But the investment advice available in the financial services world is not equal, with some advisers held to a higher standard than others.
Stockbrokers operating under a "suitability" standard need only to determine whether their client can afford an investment and whether they can handle the risk.
Under a "fiduciary" standard, a licensed investment adviser must determine whether the investment is appropriate for a client given all other investments the client holds and the goals he is trying to achieve with his money. State attorneys general can sue trustees who violate fiduciary standards.
Many of the large national brokerage firms have fought against the Labor Department imposing fiduciary standards on all brokers because if any salespeople failed to behave as a fiduciary should, the firm could be held liable.
At Fragasso, the higher standard is already being used, Fragasso said. "We are a fiduciary as a firm as well as each of our advisers. We have always acted that way, but we were ahead of the curve in achieving the Accredited Investment Fiduciary certification."
The Labor Department proposal would not require firms or individual financial advisers to achieve that certification.
That lack of required training is a concern, Fragasso said. "Our industry is so fragmented that the investing public doesn't understand the difference between a securities salesman and an investment adviser. What are you going to do with 40,000 securities salesmen in the industry? Are you going to make them fiduciaries overnight simply because a regulator declared it so?"
If the Labor Department proposal is adopted, it would be one of the most significant acts of rule making to affect financial advisers doing business with retirement plans and individual retirement accounts since the Employee Retirement Income Security Act was passed in 1974. That legislation established workplace 401(k) retirement plans.
Despite a recent endorsement from the White House, the Labor Department proposal, first introduced in 2010, was once again sidetracked -- this time by the House this year. More hearings are scheduled for August. The public comment period closes today.
One outspoken supporter of the fiduciary standard proposed by the Labor Department is Ken Dolan, a 40-year veteran in the financial services industry and co-host of the Jupiter, Fla.-based The Dolans' Money Revolution, a Web seminar series focusing on personal finance. His co-host is his wife, Daria.
He said it is sad that a law is needed to get investment advisers to do right by their clients.
"It's amazing that someone counseling clients on their finances must be regulated by the government," Dolan said. "The [Labor Department] proposal essentially says that an adviser must put their client's interest first. Why do we need a law to say that? I'm not down on all financial advisers. I hate the crooks who call themselves financial advisers."
He said part of the problem is that clients are often afraid to ask important questions of their financial advisers.
"Investors have been abused mainly because they do things they don't understand," Dolan said. "A financial adviser's job is to work with the client in the client's best interest.
"We shouldn't need a law to make that happen. That is what they should be doing by definition. The [Labor Department's] proposed changes will not stop many abuses because the government can't police it."
A Section on 07/21/2015