(Bloomberg) — What's more important to people saving for retirement — advice that comes without conflicts of interest or advice they can afford?
The U.S. Labor Department came out against conflicts of interest in April when it issued rules holding people and companies that offer advice on 401(k) and similar retirement plans to what's known as a fiduciary standard.
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That means they must put their clients' best interests first. Wall Street firms are challenging the rule, arguing that it may make professional advice too expensive for millions of households.
This quick Q and A from Bloomberg will help you make sense of the DOL fiduciary rule, if you haven't been keeping up with the over-two-year-long saga:
Although President Obama vetoed a Congressional resolution against the rule, the House will soon try to nullify it. (Photo: AP)
1. What's happening?
Congressional Republicans passed a resolution seeking to nullify the rule, and President Barack Obama vetoed it.
The House of Representatives plans to take up a motion to override, possibly as early as Wednesday, but it seems unlikely to pick up enough Democratic support to reach the two-thirds margin required.
A number of Wall Street groups and the U.S. Chamber of Commerce have filed lawsuits to block the rule.
They charge that the Labor Department encroached on the U.S. Securities and Exchange Commission's territory and overstepped boundaries set for it by Congress for regulating broker-dealers.
Concerns over clients being pushed into high-fee products are what drove the DOL to create the fiduciary rule. (Photo: Getty)
2. How did we get here?
Under the old rules, the Obama administration said, brokers could boost their compensation by pushing clients into high-fee products instead of better alternatives. Concerns over the potential for conflicts of interest led lawmakers and regulators to hone in on the $14 trillion industry, particularly sellers of annuities.
Senator Elizabeth Warren, a Massachusetts Democrat, sent a letter last year targeting those companies for their practice of offering personal perks, including diamond-encrusted rings and cruises, to entice brokers to sell their products.
Advisors must disclose conflicts of interest to customers. (Photo: Getty)
3. How does the system work under the new fiduciary rule?
Advisers can still collect commissions from sales of certain retirement products, but they'll have to disclose conflicts of interest to customers.
Ahead of the rule's announcement, insurers including American International Group Inc. and MetLife Inc. sold broker-dealer operations to limit conflicts with units that manufacture annuities.
DOL Secretary Thomas Perez said the DOL fiduciary rule won't be overturned by lawsuits. (Photo: AP)
4. What's the debate?
A wide range of companies fought the rule before it was finalized.
They said that its increased compliance costs would make it too expensive for them to manage money for low-income people with smaller accounts. The White House argued that savers were losing $17 billion a year as a result of being pushed into investments that were a better deal for their brokers than for them.
The industry has cited the effects from a regulation in the U.K., announced in 2012, that banned financial advisers from receiving commissions on some products. John Griffith-Jones, chairman of the U.K.'s market regulator, has urged companies to fill an advice gap left by the new rules.
Want to know more? Browse all our DOL fiduciary rule coverage here.
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