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We are now at the pivot point of the Labor Department’s new rule mandating that advisors to retirement plans sell or recommend only what is in “the best interests of clients.” Before, they only had to recommend and sell what was “suitable.” An investment that was “suitable” because it included, say, some bonds or bond funds for someone close to retirement could, at the same time, be charging ongoing fees of 1 to 2 percent per year. To act in the best interest of clients would now require the advisor or broker to find something comparable but less expensive if such an investment existed --- or face a possible lawsuit.

My definition of a “professional” in any walk of life is someone who makes recommendations to their clients that they would make for themselves in their own behalf knowing what they know about the products and/or services of the profession in which they practice. The fact that the U.S. Department of Labor felt compelled to step up with a 1,000-page manifesto that has outlawed the siphoning off of retirement assets by the financial services industry says something about the lack of professionalism, generally, in my industry.
Back when financial services regulations were being scrapped and de-regulation was on everyone’s lips, Alan Greenspan made the remark that should haunt him still when he said that the instincts of self-preservation would prevent the financial services industry from taking excessive risks. He might just as well have said, “they would never do anything greedy or stupid.” Well, we all know how that turned out.

The timing of this regulation could not be better. The Dodd-Frank regulations have put a severe crimp on the ability of huge financial institutions to make the kind of money they once made in bond trading and derivative sales. Abhorring a vacuum, they have been turning to more consumer-related services typified, say, by Goldman Sachs which has launched a banking service for people like you and me. All the “takers” who only pay social security, Medicare, sales, and property taxes may now bank with Goldman --- a company with a 147-year history of working for the “makers.”

With embattled financial services companies lining up to capture as much as possible of the $17 trillion in various retirement accounts including 401(k)’s 403(b)’s IRA’s and other accounts protected by the Employee Retirement Income Security Act, it was only a matter of time before abusive treatment of retirement savers would become a greater threat than it has been to date.

The suitability standard so far has meant pretty much that “anything goes.” In the retirement plan arena, both sellers and buyers seemed to feel that “any 401(k) was better than no 401(k)” and cost didn’t seem to matter since it just came out of plan earnings --- not anyone’s actual pocket or checkbook. As for quality of the investments, past performance is no guarantee of anything, so why even consider it? We’ll just recommend what pays us the most money. This combined mentality began to change with Labor Department and congressional hearings pointing out that the missing 1 percent (compounded) cost investors as much as one third of what otherwise could have been their account balance by retirement.

What has reshaped the playing field are the lawsuits against major companies like Boeing, Kraft, Oracle, Chevron, John Deer, Anthem and many others in what is becoming a long train of settlements in behalf of plan participants at the expense of their employers. Insurance company Mass Mutual reached a $30 million settlement for bilking its own employees.

The new regulation requiring advisors to act as fiduciaries extends out to IRA rollover accounts, so on an individual basis, retirees and plan participants should reap the benefit of more objective advice and a new level of professionalism on the part of those purporting to be working in the sole interests of those whom they are serving. In other words, thanks to a government regulation, they are giving advice that they would take themselves knowing what they know about their business --- that, or facing some consequences.

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