Dept of Labor to make your self-directed IRA a lot more expensive

[glenn1]

So in the name of protecting you, the Department of Labor is preparing to require a fiduciary standard for broker/dealers and custodians of IRA plans. So say goodbye to having an IRA at a low-cost online broker like Sharebuilder, E-Trade, etc and being able to buy a 100 shares for 5 bucks or so. And even for those who don't pick their own investments and accounts with full-service brokers, this rule would save you from the crappy self-serving advice from evil stockbrokers, they'll instead require you to fork over a percentage-based management fee for giving you their crappy advice.

Bonus points to anyone who knows how a broker/dealer implements and documents for compliance purposes the higher requirements of a fiduciary standard vs. the current "reasonableness" standard.

http://www.investmentnews.com/article/20110304/FREE/110309933

Financial adviser training and compliance expenses could spike for broker-dealers of all sizes — and become especially burdensome to smaller firms — if the Labor Department applies its proposed fiduciary rule to individual retirement accounts, observers say. The issue was front and center this week at hearings on a rule change that would expand the definition of fiduciary under the Employee Retirement Income Security Act of 1974.

The rule, as proposed, would designate as a fiduciary anyone who renders advice to a retirement plan or participant for a fee or who provides advice or recommendations on the management of securities. And because the Labor Department has rule-making powers over IRAs, any regulation change would apply to them, too.

That has broker-dealers anxious about compliance sticker shock.

“We've made enormous strides in addressing where we see ERISA going, so if we have to apply them to IRAs, so be it. But that doesn't mean it won't have a substantial impact,” said Paul Tolley, chief compliance officer at Commonwealth Financial Network.

Under the proposed rule, broker-dealer firms and their representatives wouldn't be allowed to receive commissions on IRAs. Complying could require dually registered firms to shift their IRA business from the brokerage side of the business to the registered investment advisory side in order to allow firms to charge an asset-based fee on the accounts. If that happens, smaller accounts could be left out in the cold due to a shift to the higher-cost model.

“For small IRAs with limited trades, the asset-based account is going to cost more,” Kenneth E. Bentsen, executive vice president for public policy and advocacy for the Securities Industry and Financial Markets Association, said at the hearing.

Peter Schneider, executive vice president and general counsel at Primerica Inc., said that the firm would have to aim for a minimum account size of $25,000 if it had to switch to an advisory model.

Clients can now open an IRA with Primerica with as little as $250. By comparison, Commonwealth has a stated account minimum of $50,000.

“If you raise the advisory fee to cover [Primerica's] costs it becomes so exorbitant that it doesn't make sense to open an IRA,” Mr. Schneider said.

Then there are the logistics of shifting so many accounts, not to mention what Mr. Tolley expects to be a hefty price of training advisers in the new vernacular. How firms respond to increased responsibility over IRAs would depend on their resources.

Aside from notifying clients, firms would have to re-register their accounts at the custodial level as they convert IRA business held in brokerage to an advisory account, said Lisa Roth, president of Monahan and Roth LLC, a compliance consulting firm. She is also chairman of the Financial Industry Regulatory Authority Inc.'s small-firm advisory board.

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[Jadow]

F that

 

[Thump553]

The article OP linked doesn't even bother to post any of the language of the PROPOSED rule they are so up in arms about. The article gives no basis for the claim the ERISA rules will apply to IRAs.

This is either a really badly written article/blog or a propoganda piece written by some broker to protect their commissions. Take your choice. What it is not is informative in the least bit.

 

[glenn1]

The article OP linked doesn't even bother to post any of the language of the PROPOSED rule they are so up in arms about. The article gives no basis for the claim the ERISA rules will apply to IRAs.

This is either a really badly written article/blog or a propoganda piece written by some broker to protect their commissions. Take your choice. What it is not is informative in the least bit.

Here you go, happy reading:

http://webapps.dol.gov/FederalRegister/HtmlDisplay.aspx?DocId=24328&AgencyId=8&DocumentType=1

As far as your supposition that it may not affect IRA's: I quote from the proposal:

For example, the proposed rule would define certain advisers as fiduciaries even if they do not provide advice on a ``regular basis.'' Upon adoption, the proposed rule would affect sponsors, fiduciaries, participants, and beneficiaries of pension plans and individual retirement accounts, as well as providers of investment and investment advice related services to such plans and accounts.

 

[Zebo]

Big boys controlling govt again. We are corrupt.

 

[sactoking]

Seems like this is key:

The rule, as proposed, would designate as a fiduciary anyone who renders advice to a retirement plan or participant for a fee or who provides advice or recommendations on the management of securities. And because the Labor Department has rule-making powers over IRAs, any regulation change would apply to them, too.

So, if you don't render advice for a fee or provide advice or recommendations on the management of securities, there would be no new fiduciary duty. Simple solution:

"Do you want to have E-Trade's experts available to you?"

"Yes"

"The minimum amount to open the account is $25,000 and the annual fees are..."

-or-

"No"

"The minimum to open the account is $100. Please sign this form acknowledging your waiver of access to our advisors."

 

[Aegeon]

The OP's objection and claim in this case in this case is simply preposterous. As noted, as long as you don't want someone serving as an adviser, this rule will have no impact.

What happens right now is you have "advisers" who are usually really salesmen with no real financial qualifications who direct their clients to funds with 5&#37; loads (taking 5 percent off the invested funds immediately right off the bat) and with with high expense ratios to boot. They do this specifically picking the funds that give the "adviser" or the company he works for the greatest kickback, rather than what would actually make financial sense for the investor. In many cases they then proceed to in a fairly short period shift around the individual's funds again so they lose 5% again and the "adviser" gets another kickback from the funds with its own 5% load. Right now the "advisers" can do all this and basically get away with it since they can call themselves advisers while not really considered advisers at all legally by the SEC.

What the rules would do is make these "advisers" potentially liable in a lawsuit or possible SEC penalties if they act in a way that could not possibly be considered in the best interests of a client given the facts or what is known about portfolio management and the like. (Merely being wrong and the client losing a bunch of money would not quality as long as the portfolio plan was defensible and could be seen to have reasonably made sense when the advice originally given.)

This rule is about preventing these "adviser's" to basically outrageously legally rob their clients completely blind, (in many cases effectively taking 10s if not 100s of thousands of dollars over time) without having to worry about any consequences. I find it extremely hard to see how anyone can argue against this in good faith. (At best you might be able argue there are a few situations where the rules don't need to extend since they are not the problem.) This is mostly simply about false advertising and making sure investors are really getting real financial advice instead of a salesman with no qualifications selling them whatever he thinks he can get away with while claiming to be their financial adviser.

 

[Dulanic]

What Aegeon said is right on. The current "advisors" are out for themselves not the client. This would be a good rule since we can pass on said "advisors" by using things like ET and others and waiving the use of an advisor.