A huge battle over small savers is coming to a head

Small savers are at the heart of an intense internecine struggle that has gripped the financial advisory community for the past five years and now appears on the cusp of solution.

At issue is a simple question: Does the current regulatory environment leave savers at risk of getting investment advice that enriches their advisers at the savers' expense, or does it foster an environment where everyone can get access to financial counsel no matter how much or how little money they have to invest?

Billions of dollars swing in the balance. Advocates of a new rule that would impose a so-called fiduciary standard on anyone selling retirement products maintain that those billions should go into the pockets of savers, who are missing out on better-returning investments because of conflicted advice.

Opponents maintain these savers will lose more than they gain because the rule will make it too complicated and costly to deal with small savers. That could leave a vulnerable population muddling through a complex environment on their own.

What's this battle all about, and how does it affect you? Here are some answers.

What's going on?

The Department of Labor, which enforces the seminal law governing retirement plans, is attempting to impose something called "fiduciary duty" on anyone selling investment products to a retirement plan, including individual retirement accounts. It first floated a new "fiduciary rule" in 2010. Industry opposition led to a rewrite. Now, the apparently final rule is out for public comment, which could allow it to go into effect as early as next year.

What does the "fiduciary" rule mean?

It means anyone who provided specific investment recommendations to a retirement plan -- including an IRA -- would have to act in the best interest of the retirement plan's beneficiary. That would require the adviser to steer clients away from products with exorbitant fees or substandard returns.

Don't they have to do that now?

No. Right now many financial advisers earn all or a portion of their income through commissions on products they sell. Thus, when a customer comes in looking for a stock-market mutual fund, they may direct that customer to a so-called "load" fund that pays the adviser a commission, even though a lower-cost fund could offer better long-term results.

They might also suggest the consumer buy whole life insurance, rather than a cheaper term life policy, because the commission on a whole life policy pays the adviser vastly more. However, the pending rule doesn't affect this conflict.

In either case, the investment advice is likely to appear "free," but in reality, over time it could cost the consumer tens of thousands of dollars more than a lower-cost alternative. Indeed, the Council of Economic Advisers has estimated that this type of conflicted advice will cost retirement savers some $17 billion in lost investment returns.

What's the argument against eliminating conflicted advice?

Commission-based advisers and brokers say small savers can't afford to pay upfront fees for financial advice. Commissions allow them to provide counsel to people who couldn't afford to buy it otherwise. However, the Department of Labor rule wouldn't eliminate commissions. It would simply require advisers to disclose all of their fees, including commissions and marketing fees; estimate the cost of those fees over time; and resist promoting products that enrich the adviser to the detriment of his or her client.

Does this mean small savers would get less retirement planning information and advice?

Not necessarily. In a Q&A aimed at explaining the rule, the Department of Labor specifically noted that advisers and plan sponsors can provide all sorts of investment education without triggering the fiduciary rule. This could include everything from explaining the importance of saving to how your investment mix should change over time.

Advising a 25-year-old to invest primarily in stocks for retirement, for instance, wouldn't trigger a fiduciary duty to that client. Nor would explaining the differences between stocks, bonds and real estate investment trusts (REITs). Fiduciary rules would be triggered only when or if an adviser attempts to sell you a specific product, such as a stock or a mutual fund.

Adds Marilyn Mohrman-Gillis, director of public policy for the Certified Financial Planner Board of Standards: "It defies credibility that financial advisers, who can still receive commissions for their advice, will walk away from billions of dollars in small IRAs accounts because they are required to provide advice that is in the best interest of the client. It is also inconsistent with our experience. Today, there are thousands of Certified Financial Planners across the country who provide fiduciary level advice to small savers."

When is this rule likely to be enacted?

That's unclear. Lobbying heavily against it are well-funded opponents, including big brokerage houses and insurance companies. Indeed, the House Financial Services Committee recently held hearings on a related bill -- the deceptively named "Retail Investor Protection Act" -- which would prevent the Labor Department from passing the rule without action from another government agency, the Securities and Exchange Commission.

Mercer Bullard, president of a consumer advocacy organization called Fund Democracy, said in congressional testimony that requiring this additional step would effectively kill the Labor Department's fiduciary rule by subjecting it to the other agency's "longstanding rulemaking paralysis."

What should consumers do in the meantime?

Use a healthy dose of skepticism when a financial adviser suggests that you buy any product. Ask how the adviser is paid, what the relative performance of similar investments is and why this recommendation is being made specifically for you. A good adviser shouldn't find those questions difficult to answer.

Additionally, mutual fund rules require that all funds publish a summary description of the fund, which includes its fees and charges. Make sure to read it. You can also get detailed disclosures on other investments, such as variable annuities, but only if you ask.

Avoid any adviser who's reluctant to provide all the relevant disclosures. Moreover, if you're investing a significant amount, consider getting a second opinion. In today's environment, trusting that your financial adviser has your best interest at heart can be hazardous to your wealth.