Brokerages may have to change business practices: DOL

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Conflicts of interest have been running rampant throughtout the financial services industry. Most advisors have good intentions and work hard for their clients. However it only takes a few to force regulators to step in.

Revenue sharing, or fees that brokerages receive from some securities issuers for promoting those products, can sway advisers to recommend them to IRA investors, even when those products are not in the client’s best interest, Borzi told Reutersin a recent interview.”By and large, are compensating brokers for steering clients to their products,” said Borzi, the proposal’s chief architect. “If a brokerage’s business model is built around compensating them for giving conflicted advice, then they would have to change their advice.”

Until recently, the Labor Dept. focused its attention on 401(k)s and largely left IRA advice alone. That changed with its a recent proposal to update a piece of ERISA.

If the ERISA update moves IRA advice under the fiduciary definition, brokerages will likely have to make significant changes to their compensation models. That’s because they would no longer be able to act in a clients best interest under ERISA in cases where they receive money from a securities issuer.

The fiduciary standard is coming.

Please comment or call to discuss.

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Investment firms pulling out all stops against financial adviser rule change

WASHINGTON, DC - FEBRUARY 16:  U.S. Sen. Josep...
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It is well documented that 401(k) plan sold by insurance comapnies and stockbrokers tend to be the most expensive in the industry. These business models are designed to sell product to the plan participants once the plan is sold. Although not all insurance agents or stockbrokers are deceptive there is no assurance that the conflict of interests are in the best interest of the employee.

In a statement to The Hill, Phyllis Borzi, Labor’s assistant secretary for EBSA, said investigations by Labor, the Securities and Exchange Commission, the Government Accountability Officeand others show that conflicts of interest for financial advisers result in lower returns and higher fees for investors.“Conflicts of interest and a lack of accountability are widespread in the marketplace for retirement advisory services. An adviser’s compensation is often directly tied to the specific investment recommendations that he makes, and there is a real danger that the adviser’s recommendations will not be based solely on the customer’s interest, but instead will reflect the adviser’s own financial self-interest,” Borzi said.

“Simply put, we are seeking to protect the millions of employers and small-business owners, workers and IRA holders who rely on investment advice by working to address these conflicts. We think this effort has merit and we are committed to getting it right.”

The fact that both Democrats and Republicans are opposed to the fiduciary rule. Is this because the financial services industry is lobbying both sides of the aisle? Why?

Please comment or call to discuss.

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