Now that there is no fiduciary standard regulating brokers who target the $435 billion IRA rollover market, state securities regulators are increasingly worrying, and with good reason: A new survey from NASAA found that not one of the 96 broker-dealers questioned provided fiduciary level advice to investors doing IRA rollovers before the now-defunct U.S. Department of Labor fiduciary standard was introduced.
Instead, firms relied on a suitability standard, which allows brokers to sell “good enough” products and services when better and less expensive investments are available. The U.S. government estimates that conflicted advice costs investors some $70 billion annually.
“The investor protection gains made as a result of the DOL fiduciary rule should be preserved in any subsequent rulemaking by the SEC and other agencies. It would be a shame to let the pendulum swing back,” North American Securities Administrators Association (NASAA) President Joseph Borg said.
“From a regulatory perspective, there is absolutely no merit to the concept that rollover dollars should be treated differently under the law than they were as a part of an employer-sponsored retirement plan,” said Borg, who is also director of the Alabama Securities Commission.
The NASAA report clearly demonstrates that before the Fifth Circuit Court of Appeals vacated the DOL fiduciary rule on March 15, none of the 96 firms that were surveyed were providing a standard of care other than suitability to IRA rollovers. However, after the DOL’s fiduciary rule was adopted, many of the firms surveyed—which include the nation’s largest B-Ds and wirehouses—were taking significant steps and expending considerable time and resources to modify their policies for handling IRA rollovers to bring practices into compliance with best interest standards, the survey found.
Firms’ efforts to comply with the DOL fiduciary rule included providing brokers and insurance agents with policies and guidance for recommendations, NASAA said. The IRA rollover market is highly-targeted by the brokerage industry. More than 5 million taxpayers roll over in excess of $435 billion annually, according to the IRS report.
Currently the SEC’s newly proposed “Regulation Best Interest” rule does not include a fiduciary standard for brokers; nor does it define what “best interest” is with regard to the standards brokers must uphold when selling products and services to customers.
Detecting and combatting broker sales abuses has been front and center at NASAA. The organization, in conjunction with the state of Massachusetts, announced a $26 million settlement with LPL Securities earlier in May after regulators detected the firm had allowed brokers to sell unregistered, unsuitable securities to investors.
As states themselves move forward with their own fiduciary laws and rules, NASAA itself may introduce a model act requiring brokers to act as fiduciaries whenever recommending clients roll over retirement assets into IRAs.
“With the responsibility of saving and investing for retirement increasingly falling on the shoulders of hard-working Americans, we must make sure that they have the peace of mind that all qualified financial professionals are giving them advice that is in their best interests,” Borg said.