Tuesday, July 26, 2011

Millions of Small IRA Savers to Lose Access to Advice?

According to Bloomberg, that is the message being pushed in a hearing on the Hill today about the Department of Labor's proposal to expand the definition of fiduciary.

What pops off the page are comments from the Consumer Federation of America:
“I think the industry is not exaggerating when they say they will abandon this business,” Barbara Roper, director of investor protection for the Consumer Federation of America in Washington, said in a telephone interview.
What is the problem?
If firms are considered fiduciaries by the Labor Department, selling investors bonds from a brokerage’s inventory or recommending a trade that would generate a commission may be considered a conflict of interest and a “prohibited transaction,” said [Jim McCarthy of Morgan Stanley[.
What is the consequence?
The change may cause financial firms to offer fewer investment options in retirement accounts and shift to a fee- based model used by investment advisers, which may increase costs, Kenneth Bentsen, executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association, said at a Washington hearing before the House Subcommittee on Health, Employment, Labor and Pensions. “Most firms require a minimum account balance for advisory accounts that could result in millions of IRA account holders being dropped,” Bentsen said in written testimony. There are more than 7 million IRA accounts with balances under $25,000 that are commission-based, according to Sifma, a lobbying group for banks and brokerages.
What is the response?
“The broker concern is perhaps due to misunderstanding,” Assistant Secretary of Labor Phyllis Borzi said at the hearing. “We’re not intending to overturn a commission-based system."
If that is true - - and this all a big misunderstanding - - shouldn't the Department of Labor slow down and publish the parts of the rule that it believes will satisfy those speaking out on behalf of small investors?

The Department says they are coming after the rule is published. For millions, that could be too little, too late.