The Obama administration announced a new rule on Wednesday, April 6, setting a higher standard for stock brokers.
The new rule, known as the Fiduciary Standard, requires retirement advisors to act in the clients’ best interest above all.
Previously, brokers were required to just recommend investments that could be considered “suitable” for the client. However, after reports of numerous rip-offs in which brokers were suggesting investments that would result in higher payments for themselves regardless of the effect on the client, the government is speaking up for the investors who are trying to save for retirement.
While many advisors are honest, some have been willing to risk a client’s loss if it meant a personal gain. For instance, an investment advisor might make $150 if he invests a client’s money in a bond fund, but $200 if he invests that money in a stock fund. Dishonest advisors will recommend the fund that pays them more.
Some in the financial industry, however, are concerned, speculating that the Fiduciary Rule might make investment advice more expensive due to extra legal paperwork and compliance expenses. Some Republicans are even calling the rule “harmful.”
“This rule would raise costs and limit options for people seeking advice on their retirement planning. This rule could hurt millions of middle-class savers,” stated Republican House Speaker Paul Ryan.
Advocates of the rule disagree. Labor Secretary Tom Perez argued, “This rule is a huge win for the middle class. These rules will save affected middle-class families tens of thousands of dollars for their retirement.”
President Obama called it a “very simple principle.” He said, “You want to give financial advice, you’ve got to put your client’s interest first.”
The Obama administration maintains its stance that investment advisors and stock brokers should be working for the client and should be held accountable for their advice.
U.S. stock brokers are required to obtain licensing by taking and passing two exams: the Series 7 and the Series 63. By passing these examinations, they prove their complete comprehension of stock trading and investment; therefore, a “bad trade” or “bad investment” for a client should not be happening as often as it is, and stock brokers certainly should not be making a profit from it.