President Obama announced that he backs rules that would make retirement advisers put their clients' interests first, calling on the Department of Labor (DOL) to crack down on Wall Street and protect families from conflicted and bad retirement advice. The DOL will issue a notice of proposed rulemaking that would require retirement advisers to abide by a “fiduciary” standard.
In his announcement last Monday, the president said,
There are a lot of very fine financial advisors out there, but there are also financial advisors who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns,“ President Obama said last Monday.
So what happens is these payments, these inducements incentivize the broker to make recommendations that generate the best returns for them, but not necessarily the best returns for you.
They might persuade investors, individuals with savings, to roll over their existing savings out of a low-fee plan and into a high-cost plan.
They might even recommend investments with worse returns simply because they get paid to recommend those products. And one study by professors at Harvard and MIT had researchers send people to pose as middle-class investors seeking investment advice from advisors. In 284 client visits, advisors recommended higher-fee funds about half the time. The lowest-fee funds were recommended only 21 times.
In the coming months, the DOL will seek extensive public feedback on the best approach to modernize the rules on retirement advice and set new standards, while minimizing any potential disruption to good practices in the marketplace.
Here's a breakdown on how conflicts of interest hurt you:
A report from the White House Council of Economic Advisers (CEA) shows conflicts of interest cost middle-class families who receive conflicted advice huge amounts of their hard-earned savings. It finds conflicts likely lead, on average, to:
- 1 percentage point lower annual returns on retirement savings.
- $17 billion of losses every year for working and middle class families.
A strong set of independent research shows that these losses result from brokers getting backdoor payments or hidden fees for:
- Steering clients' savings into funds with higher fees—and lower returns even before fees.
- Inappropriate rollovers out of lower-cost retirement plans into higher-cost vehicles.
Wall Street and the insurance industry do not want to see this rule implemented.
Brokers and agents are now guided by a weak standard called ”suitability.“ You can't take them to court over being fleeced, however. You are forced to agree to mandatory arbitration, a forum that the industry essentially controls.
Yet working with a fiduciary such as a certified financial planner, registered investment adviser, or certified public accountant is a good thing and brings integrity to the industry. If these advisers wrong you, you can sue them.
Wall Street and the insurance industry are insisting that the fiduciary proposals — languishing in red tape purgatory for six years — are going to deprive you of financial advice or products. This is false.
You'd not only have access to advice, your advisers would be legally bound to offer products and services that serve you first, not their bottom line. Even now, you can get advice through employers, mutual fund companies, discount brokers and online sources. Much of it is low cost or free.
As Brian Graff, Executive Director of the National Association of Plan Advisors (NAPA) said,
People should be protected from unfair and deceptive practices.
But all indications are that this rule will block Americans from working with the financial advisors and investment providers they trust simply because they offer different financial products — like annuities and mutual funds — with different fees. This rule could even restrict who can help you with your 401(k) rollover
The best way to address concerns about ”hidden“ fees is through better transparency, not by blocking 401(k) participants from working with the advisor of their choice,” Graff explained.
If the administration moves forward with this proposed rule, American savers will be forced to pay out-of-pocket for their financial advice, or be limited to financial products with identical fees. Tens of millions of American savers who cannot afford to pay out-of-pocket will lose access to their financial advisor or be severely restricted in their choice of financial products.
This is a wolf in sheep's clothing. This so-called “conflict-of-interest” rule is really the “No Advice” rule.
Wall Street and consumer advocates have pushed for transparency for years, which is now prevalent in retirement plans and all sorts of financial documents.
Will retail brokerage or retirement savers get hurt?
Smarter retirees would embrace fiduciary advisers or jump to online robo-advisers, who are not interested in selling products. Anyone could still go to a broker; in fact, they might save a lot of money by going to an online discount broker who doesn't give any advice.
Here's how much money is on the line, according to the President, who is citing some key financial research:
On average, conflicts of interest in retirement advice results in annual losses of 1 percentage point for affected persons.
I know 1 percent may not sound like a lot, but the whole concept of compounding interest — it adds up. It can cut your savings by more than a quarter over the course of 35 years — cut your savings by more than 25 percent. So, instead of $10,000 in savings growing to more than $38,000, it will grow to just over $27,500. That's a big spread.
Making all or most advisers fiduciaries is in the best interest of the industry. Although they may have to charge flat fees for advice, they would have to curb the selling junk investments and be compelled to recommend low-cost products. That would ultimately lower the cost of investing for everyone. As the fiduciary rules marinated in stagnant Washington agency inboxes, the word has spread on what their implementation would mean to consumers.
No more garbage mutual funds in 401(k)s. No more selling variable annuities to people in their 80s. No more vehicles with multiple layers of hidden fees. The rules would cost Wall Street billions, but save retirees even more.
What can you do now as this epic battle takes place?
If you're rolling over a 401(k) balance into an IRA, consult with a fiduciary adviser on the best portfolio that will last the rest of your life.
And if you have plenty of time before you retire? Call the White House and tell them they're doing the right thing. Then call the SEC and Labor Dept to get their act together to get those fiduciary rules on the books.