Financial services companies and professionals should expect the Securities and Exchange Commission to sync up its retail advice rules to meet the more vigorous U.S. Department of Labor standards, Morningstar’s head of retirement services and policy Aron Szapiro predicted in an exclusive interview today.
That means broker-dealers and registered investment advisors will be required to clearly explain and document to two regulators instead of one how their advice will add value for investor assets when they recommend retirement plan and IRA rollovers.
“I think both agencies are going to align on a higher standard. It doesn’t make sense for SEC examiners to be looking at three-fourths of the stuff that the DOL is requiring now,” said Szapiro, who has had meetings with regulators.
“I think they’ll clarify where you’ll have to mitigate conflicts of interest, look at what they can require on Form CRS [customer relationship summaries] for better and more consistent disclosures and align the documentation that is required on rollovers,” Szapiro said.
Approximately $500 billion exits retirement plans annually, and much of it is ripe for rollovers, according to forthcoming Morningstar research.
While larger firms have much of the automation and data in place to meet the DOL rules, a significant number of smaller and midsize firms are still struggling, Szapiro said.
The rules also mean that reps and advisors will be required to create and store detailed justifications for their recommendations for clients in a competitive marketplace where the price investors pay for retirement plan assets continues to decrease and may be significantly lower than what an advisor recommends and charges.
In other words, many advisors will be unable to use lower costs as a justification for rollovers. That’s because many retirement plans use inexpensive index funds or target-date funds, and more than 50% of retirement plans are invested in typically lower-cost collective investment trusts (or CITs), a type of tax-exempt pooled investment vehicle that is unavailable to advisors, Szapiro said.
In essence, the DOL rules require financial professionals to define their value proposition by telling clients: “Your asset costs may be lower now, but I’ll give you asset allocation that is right for you and provide other services and advice as needed, such as for drawdowns and nonretirement assets,” he added.
The veteran policy analyst said he doesn’t see the SEC or DOL proposing sweeping new rule proposals, but rather crafting guidance and making adjustments to sync up existing rules.