Insights | 01.16.19
Outlook For 2019: Retirement Savings, Accountability on the Rise
For the better part of the past two years, providers of financial advice have been elevating their accountability in anticipation of some form of intensified regulatory scrutiny, particularly with respect to stewardship of retirement assets.
In 2019, some clarity on industry-wide customer-care standards should finally arrive from federal authorities — right as retirement savers are getting greater opportunities to build up accounts.
In his "Rulemaking Road Ahead" speech in early December 2018, Jay Clayton, chairman of the U.S. Securities and Exchange Commission (SEC), emphasized that looking out for Main Street via the proposed rule, Regulation Best Interest, will be a priority initiative during the next 12 months.
In spring 2018, the SEC proposed rules to "establish a standard of conduct for broker-dealers [and related persons] ... when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer, as well as to implement related record-making and recordkeeping obligations." That rules package is squarely aimed at making sure advisors and brokers act in the “best interest” of clients. One crucial and controversial component: a standardized form for advisors to disclose any conflicts (e.g., personal financial incentives connected with the sale of a fund) in straightforward terms (i.e., not convoluted jargon buried in fine print).
"This is a very important and long overdue initiative," Clayton said of the rule, which is in the final stage of being reviewed.
Since introducing the proposal, the agency has conducted seven investor roundtables regionally. SEC staffers are reviewing feedback from these events, in addition to some 6,000 comment letters the agency has received since spring 2018.
Distinctions with a Difference
"Broker-dealers and investment advisors both provide investment advice to their customers, but have different relationships and are subject to various different regulatory regimes," Clayton said. "However, many retail investors do not have a firm grasp of the important differences between broker-dealers and investment advisors."
Here is a link to the full speech.
Among the service provider differences:
- The variety of services provided
- How they get paid for those services
- The regulatory framework in which they operate (e.g., registered investment advisers are regulated by the Investment Advisers Act of 1940, which is why, in the publicly released copy of his speech, Clayton’s reference to advisor is spelled with “-er”).
"This is a complex set of issues, no doubt," he said. "But we must also recognize that access to investment advice is increasingly important to our society. And we must recognize that while the current framework needs improvement, it is extensive and, in many areas, functions well for our Main Street investors, particularly as compared to other jurisdictions."
The SEC is said to be pushing full steam ahead on getting Regulation Best Interest passed, according to industry lobbyists and securities lawyers interviewed in late 2018.
This proposed rules-set emerged after the death of the Department of Labor’s (DOL) so-called "fiduciary rule." This regulation, sidetracked before it ever really fully kicked in, would have impacted licensed financial services professionals running retirement accounts.
Although never implemented, one piece of the DOL rule drew vigorous support from consumer advocates: a “contract exemption” provision that would have opened the door (some say floodgates) to class-action lawsuits. Put another way, customers who alleged wrongdoing by financial professionals would have had an outlet for recourse beyond contractually mandated broker-dealer-industry-run arbitration via the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization. The DOL rule itself got hauled into court, where it was challenged. And in March 2018, the rule was struck down.
Readying for More Retirement Savings
Because it impacted retirement assets, many advisors have been extra cautious with the handling of IRA rollovers, the core of the industry's business growth and a bullseye in terms of a space that attracts consumer protection efforts.
New tax rules are setting the stage for a boost to IRAs and retirement savings vehicles, in general.
Recent changes to how the Internal Revenue Service (IRS) treats retirement savings contributions are going to kick in this year, explained Shelly Jacobson Taylor, EA, CPA, of New York-based SJ Associates.
Current IRA plan contribution limits of $5,500 (for those under 50) will increase to $6,000, she said.
Those 50 or over can add an additional $1,000 contribution.
And as far as employee-sponsored accounts, including 401(k) and 403(b) plans, the limit will be increased: going from no more than $18,500 up to no more than $19,000. Additionally, those 50 or older as of 2019 can qualify for catch-up contributions of up to $6,000.
Meanwhile, the outlook for greater retirement savings got a boost with the elevation of Rep. Richard Neal (D-Mass.) to chairman of the House Ways and Means Committee, which happens when Democrats take control of the chamber from Republicans this month.
Capitol Hill observers say Neal has been perhaps Congress' staunchest champion of retirement legislation.
Preparing for Macroeconomic Curveballs
For all of the “nothing to see here” conventional wisdom being bandied about — that an inverted yield curve, intensifying executive branch turmoil, a trade war and a stock market correction does not necessarily spell a recession — it nevertheless behooves industry members to prepare for whatever may come, which is not to say panic or become overly defensive.
Looking ahead to Fed policy moves, the market declines of late 2018 could result in a less ambitious 2019 in terms of monetary tightening steps. Numerous other factors, such as a slowdown in global growth and the trade war, may result in a more flexible policy under which rates still rise but at a slower pace than previously signaled.
For those nervous about a recession and a bear market, keep a close watch on consumer spending data, which is published monthly by the Bureau of Labor Statistics. Many economists expect consumer spending to slow in the first half of 2019.
In terms of gearing up for macro and policy trends for 2019, this one here is among the best we have seen.
Evolving Industry Trends
From old-fashioned banks opening new financial cafes to online companies creating referral networks, expect a range of advisory players to experiment with new innovations and best-of-both-worlds hybrid approaches to meeting client needs. Meanwhile, large advisory firms are expected to get even larger, according to one industry expert.
There are now nearly 700 RIA firms with more than $1 billion in assets, out of the more than 12,000 SEC- registered RIAs, noted David Canter, head of the RIA segment at Fidelity Clearing & Custody Solutions.
“Many of these firms now have a truly national, multi-geographical presence,” Canter said.
With so much competition coming from everywhere, even outside finance, "specialization matters now more than ever," Canter said.
And as new and low-cost advisory offerings continue to emerge in 2019, industry players will need to more assertively declare a unique value proposition as a way to set themselves apart.
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.