Biden's New Financial Advisor Rule to Curb Biased Retirement Advice

The number of people in the US looking for financial advice has soared since the pandemic and continues to climb rapidly. According to research from Statista, assets under management (AUM) in the US financial advisory market could reach $62.61 trillion in 2024 from $56.83 trillion in the year prior.

More people seeking financial advice make it vital to have trusted financial advisors working in the best interest of their clients. However, the current law allows advisors to recommend investments that pay higher commissions but are not the best fit for their clients—non-fiduciary advisors. In contrast, fiduciary advisors are legally obliged to act in the best interest of their clients.

A recent analysis by the Council of Economic Advisers of one investment product — fixed index annuities — indicated that conflicted advice from financial advisors that benefit them more than their clients could cost savers up to $5 billion annually.

On April 25, the Biden Administration announced that the US Department of Labor finalized its Retirement Security Rule under the Employee Retirement Income Security Act and Internal Revenue Code by updating the scope of when financial advisors and brokers must comply with fiduciary standards. The revised definition of investment advice fiduciary would cover advisors offering compensated investment advice to retirement plan participants and individual retirement account holders starting September 23, 2024.

The move aims to protect millions of US workers who are saving for retirement and relying on financial advice to grow their egg nests. The rule could ensure that financial advisors offering investment advice in a fiduciary role offer prudent advice, avoid overcharging or misleading statements, and prioritize their clients' best interests.

This new rule updates the definition of an investment advice fiduciary, written in 1975 when 401(k)s didn't exist. The government believes that mandating financial advisors to fiduciary standards safeguards investors from biased advice that could impact their retirement wealth trajectory.

"America's workers and their families rely on investment professionals for guidance as they save for retirement," said acting Labor Secretary Julie Su. "This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest."

The Administration forecasts the rule will positively affect nearly 5 million savers and bolster US retirement accounts by between 0.2% and 1.2% annually and up to 20% over a lifetime.

Assistant Secretary for Employee Benefits Security Lisa M Gomez highlighted the dynamic investment and retirement landscape and that it's vital to respond accordingly to these rapid changes "so that workers can reach the secure retirement that they work for decades."

The White House acknowledged that advisors deserve fair pay for guiding retirement investors to match their savings goals, but Wall Street did not welcome the announcement. Several financial institutions refuted the ruling, cautioning it could ultimately "hamper the efforts of millions of workers and retirees" to save for retirement.

"Unfortunately, based on our preliminary review, it appears that the regulation will make it much more expensive and difficult, if not impossible, for many consumers to access reliable, professional assistance," according to Wayne Chopus, president and CEO of the Insured Retirement Institute.

Chopus noted the Labor Department had enforced a similar rule in 2016 during the Obama Administration, resulting in over 10 million retirement account holders losing access to their preferred financial advisors. However, the rule was revoked two years later.

Soon after, Labor Department officials responded that the new financial retirement rule differs massively from the Obama-era regulation.

"These rules are already many of the same standards set for CFP professionals," said Virginia-based certified financial planner Andrew Fincher. "It is great that practice standards will now encompass a wider net to include others within the financial professional industry."

CFP certification has been recognized as the standard of excellence for financial advisors for decades. CFPs undergo rigorous training and commit to prioritizing their clients first.