NEW YORK (MainStreet) — President Obama says Americans are getting bad investment advice -- $17 billion worth of it. Conflicts of interest with regard to what advisors recommend lead to “back-door payments” and hidden fees that enrich Wall Street brokers at the expense of our retirement savings. Obama announced a new executive action endorsing the Labor Department’s revised fiduciary standards proposal that would mandate financial advisors act in the best interest of their clients – as opposed to a “suitable” investment recommendation standard. The measure is headed to the Office of Management and Budget (OMB) for review.
"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 Tuesday. “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. And all told, bad advice that results from conflicts of interest costs middle-class and working families about $17 billion a year -- $17 billion every year."
Obama bases that figure on a new report released by the Council of Economic Advisors. The study estimated $1.7 trillion of IRA assets are invested in products that “generally provide payments that generate conflicts of interest."
The report also provided a striking example: “A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12% of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than five years earlier.”
"It's a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first,” Obama said. “You can't have a conflict of interest."
This is not the administration’s first crack at imposing stricter standards on the financial advice industry. An attempt in 2010 failed, following stiff pushback from brokers and banks, who claimed the restrictions would cost consumers more money and reduce services.
But the Certified Financial Planner Board of Standards issued a statement of support for a “client first” level of advice.
“We remain steadfast in our belief that it is appropriate for every advisor who provides financial planning advice – including professionals providing retirement investment advice – to do so under a fiduciary duty to their clients,” the CFP Board said. “We believe that, based on our experience with the application of CFP Board’s fiduciary standard across business models, that the fiduciary standard can be applied without reducing the availability of services.”
AARP, the organization dedicated to the interests of senior Americans, agreed.
“We know the people we represent have worked hard to save for retirement, and we believe that they deserve to have financial advisers who work just as hard to protect what they’ve earned,” said AARP CEO Jo Ann Jenkins in her remarks following the president’s announcement. “AARP supports having investment professionals put consumers’ interests first.”
However, the Financial Services Institute (FSI), an association representing broker-dealers and registered representatives who operate under a “suitability” standard of care rather than a fiduciary rule, was not so quick to jump on the higher standard’s bandwagon.
“FSI members are fully dedicated to protecting investors," FSI president and CEO, Dale Brown said in a statement. "Main Street investors are also protected when they have access to affordable advice to help them plan for a dignified retirement. IRA owners are already protected by robust federal and state rules governing the retirement market. Therefore, we are eager to study the re-proposed rule and respond constructively."
The Securities Industry and Financial Markets Association (SIFMA), another trade association representing securities firms, banks and asset managers, was equally skeptical.
"While we cannot comment on a proposal we have not yet seen, we have ongoing concerns that the DOL regulation could adversely affect retirement savers, particularly middle class workers,” said president and CEO Kenneth E. Bentsen, Jr. in a statement. “The new regulation could limit investor choice, cause inconsistencies as different regulators would apply different standards to the same retirement accounts, prohibit access to investor guidance, and raise the costs of saving for retirement."
With these putative problems, Bentsen recommended a course of action for the future.
"As the process moves forward, OMB must consider all of the facts, including the fact that the brokerage industry is highly regulated by the SEC and FINRA, including with respect to retirement accounts, and in particular, recent guidance by FINRA with respect to rollovers,” he said.
-- Hal M. Bundrick is a Certified Financial Planner and contributor to MainStreet. Follow him on Twitter: @HalMBundrick