Changes in fiduciary regulations being considered by the Department of Labor that would affect IRAs could actually be good for the profession and consumers, according to some advisors, although the proposed changes have elicited howls of protest from many.
The Department of Labor has proposed changing a 1975 law that would in effect expand the scope of the term "fiduciary" to include those who handle IRAs. Now, those handling IRAs, which were just beginning to emerge as a investment vehicle when the original law was passed, have several loopholes that can help them avoid fiduciary standards, says Phyllis Borzi, Labor Department assistant secretary who heads the Employee Benefits Security Administration.
One of the loopholes is that advice has to be given on a regular basis for the advice-giver to be subject to fiduciary regulations that require them to act in the best interests of the client first and to avoid conflicts of interest.
The changes would plug those loopholes and help protect the consumer, especially those who have small IRA accounts, says Mitch Tuchman, CEO of MarketRider, an online portfolio managing service. MarketRider assists IRA holders in handling their own IRA investments or provides assistance for a nominal charge.
If others no longer want to handle small IRA accounts because of the new restrictions, Tuchman argues, they should drop them, which is what critics of the proposed change say is going to happen.
"Let them drop them," Tuchman says. "I'll take them, and other entrepreneurs will emerge with cheaper ways to handle them. Many solutions will be developed; that is the way business works in America. If someone is arguing against the changes, it is because it is going to cost them money."
The fact that commissions can be charged for IRAs now and advisors can get payments from using some funds has drained money from IRAs, making them underperform compared to 401(k)s, says Borzi. The changes are designed to stop that drain from fees and from inferior investments that pay commissions.
"The (1975) law on its face is simple enough: advisors should put their clients' interests first," Borzi says. "But as always, the devil is in the details - in this case, in the question of what constitutes paid investment advice.
"We will amend the flawed 35-year-old rule, under which advice about investments is not considered to be 'investment advice' merely because, for example, the advice was only given once, or because the advisor disavows any understanding that the advice would serve as a primary basis for an investment decision."
Tuchman adds, "It is common sense these advisors should be held to fiduciary standards. If an advisor is siphoning off 2% to 4% fees over 20 years for handling an IRA, the investor is only going to earn half as much as they should on their IRA investment. But if the advisor is held to a fiduciary standard, that will stop."