- Client distribution options (these are the options the client has to maintain assets in a former employer’s plan, to transfer assets to a new employer’s plan, to roll assets over to an IRA, or to take a lump-sum distribution). The disclosures must also involve the tax implications of those options, and other considerations;
- Conflicts of interest or financial interests that firms or their reps have in recommending any specific product or account type;
- Various types of account options available to clients (i.e., IRA rollovers), including the account-level fees and expenses and services provided.
These themes are also rampant in the SEC’s ReTIRE (Retirement-Targeted Industry Review) Initiative, which looks hard at advisors’ rollover recommendations and the fees and commissions associated with them. The focus, the SEC said, is “on higher-risk areas of registrants’ sales, investment, and oversight processes, with particular emphasis on select areas where retail investors saving for retirement may be harmed.”
Specifically, the ReTIRE initiative is designed to ferret out:
- Recommendations that investors and retirees go into incorrect share classes;
- Misleading marketing materials covering investment offerings and rollovers;
- The lack of documentation to support the reasonableness of recommendations (including rollovers);
- Vague or omitted disclosures related to the fees, conflicts and services of affiliates.
Finra is also looking hard at fees and conflicts of interest in its emphasis on rollovers during exams and with its voluntary 529 plan disclosure initiative, Reish said.
In Reish’s example, someone planning to save for many years for a young child's eventual college expenses would almost certainly be better off with class A shares, which typically involve an up-front sales charge, or load, while class C shares often involve ongoing annual loads.
Finra’s crackdown is particularly timely because the Tax Cuts and Jobs Act of 2017 opened up 529 education savings plans to allow distributions to be used for tuition from kindergarten through the 12th grade.
According to Finra, “Some firms have failed to reasonably supervise brokers’ recommendations of multi-share class products.” Specifically, the agency believes there have been suitability violations related to brokers recommending 529 plan share classes that were inconsistent with the accounts’ investment objectives and were, therefore, unsuitable for the investors.
While regulators keep up the heat, the news is making its way into the mainstream media. As one daily Chicago newspaper headline screamed this week: “Is your advisor steering you into [a] fee-heavy 529 plan?"