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New Rules to Improve Retirement Investing

Changes target financial adviser conflicts of interest

Fiduciary Rule changes

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Finalization of fiduciary rules protect retirement investments and savings when working with financial advisers.

The U.S. Department of Labor released new regulations in April that require any paid financial advisers to do what is right for their customers, even if it results in lower fees, a change the department said could save investors $40 billion over 10 years. 

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The new rules, scheduled to go into effect in several phases starting in April 2017, could have a profound effect on people who are saving for retirement, according to supporters.

“It’s a tremendous victory for consumers,” says Nancy LeaMond, executive vice president of AARP, which fought hard for the change. “Bad financial advice is just wrong, and this rule will no longer permit advisers to put their own interests ahead of their clients.” 

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The rules for investment advisers haven’t changed much in 40 years, but how people save for retirement has, said the Labor Department in announcing the new rules. Pensions have in large part been replaced by 401(k)s and IRAs, which puts investment decisions on workers’ shoulders. More than ever, consumers need good financial advice.

Some advisers already adhere to a “fiduciary standard,” the legal term for putting customers’ interests first. But brokers and other professionals have only had to make sure that their recommendations are “suitable,” a much lower standard that allowed them to steer clients toward investments that pay higher fees and commissions. This conflicted advice lowers investors’ returns by as much as 1 percentage point a year—a loss of $17 billion annually for IRA investors alone, says the White House Council of Economic Advisers. Investment firms will now have to commit under contract to act in the investor’s best interest and will need to disclose their compensation. 

See also: President Obama addresses challenges for Americans in retirement

Financial-services companies fought the rules change, saying it was unnecessary and would make it too costly to provide advice to low-income investors. The U.S. Chamber of Commerce has threatened to challenge the regulations in court. And legislation pending in Congress would block the new rules.

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Still, some brokerages had already begun to change their compensation practices in anticipation of the fiduciary rule.