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New rule could lead advisers to dump small investors

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A new law may change the way financial advisers offer retirement planning and investments to consumers.

Set to take effect April 10, the new fiduciary rule handed down by the federal Department of Labor last April could leave smaller retirement investors out in the cold and frustrate financial advisers who serve small and mid-level wealth clients.

“The new rules make [fees] a level percentage of assets and require more [time-consuming] involvement,” said Michael Mills, an attorney and partner at Antheil Maslow & MacMinn LLP in Doylestown. “Those with $100,000 [or less to invest] may find it harder ... on a fee-based system, to find the help they need.”

A byproduct of the new rules, which aim to give greater protections to retirement investment consumers, could leave investors scrambling for help.

New legal requirements could make it too time-consuming for financial advisers to handle smaller portfolios or advise those customers, Mills said.

And financial planners could become frustrated or overwhelmed with the industry and compliance regulations, while being more exposed to possible lawsuits and litigation under the new rules, Mills said.

The fiduciary rule timing requires initial compliance by financial advising firms by April 10, with full compliance required by Jan. 1 next year.

That means after April 10, financial planners and advisers, now considered fiduciaries, can be held accountable by their clients and could open the door to lawsuits if an investor thinks he’s been shortchanged or wronged in some way.

“No longer finding a suitable investment but putting their clients best interest first creates ethical obligations [requiring] a lot more due diligence,” said Loren L. Speziale, an attorney with Gross McGinley LLP in Allentown.

By setting the accountability bar higher, financial planners must be prepared to legally prove they’ve put their client’s needs first.

“I think largely it is good for the consumer,” said Paul Marrella, a Certified Financial Planner in Wyomissing.

“The intention of the law is to disclose fees to the consumer. It forces a high standard of care.”

Financial advisers who manage retirement assets must now be prepared to prove they acted in the best interests of their clients, disclose fees up front and accept a higher risk for lawsuits if their advice is deemed to miss the mark.

“There is an ethical standard that is being changed, and that impact increases the number of people affected,” Speziale said.

“Best interests are going to be … open to interpretation. The best intent is putting the client’s needs [or profit] before your own” regarding financial reward, Speziale said.

Other factors which should always come into play when making investment suggestions, including market risk-tolerance or risk aversion, working status, number of years until planned retirement age and retirement goals, said Bob Podraza, a financial adviser with Edward Jones Investments in Quakertown.

More regulatory compliance could mean less time to engage with clients, and level commissions could mean smaller portfolios aren’t attractive enough to warrant the time needed to service them.

“It’s creating a lot of paperwork,” Podraza said.

Still, the fine line between serving a client and self-service isn’t so cut and dried.

Questions clients should ask their financial adviser include “where do you put your money, and would you make this investment?” Marrella said.

Clearly communicating fees up front, as well as how fees are achieved, and signing any disclosure documents will become the new normal, according to Marrella.

He said the new ruling also “raises the bar of professionalism for the industry.”

The new fiduciary rule also provides a 12-month grace period for firms to create new compliance programs.

“Fee and commission structures do have variables,” Speziale said. “There is clearly going to be an exposure and liability, but just what [that means] is a gray area.”

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