Saving for retirement is extra-hard these days, and not just because wages are low and millions of Americans are still struggling to make up for ground lost after the 2008 financial crisis. All too often, the difficulty is compounded by gaps in the rules for the financial professionals who provide retirement-planning advice.
As things now stand, too many of those professionals can present themselves as (and enjoy the benefits of being perceived as) advisors with your best interests in mind, yet go ahead and recommend investments that will generate more money for them, and less for you.
It’s a huge problem, and the Securities and Exchange Commission and the Department of Labor are each in a position to fix important pieces of it. The SEC’s part goes back to a 1940 law which gave registered investment advisors a fiduciary duty to look out for the best interests of those they serve, while treating broker-dealers as salespeople with only a looser obligation to recommend “suitable” investments. The Labor Department entered the picture in 1974, when the Employee Retirement Income Security Act authorized it to regulate employer-sponsored retirement plans and some of the professionals who help people make decisions related to those plans.
But the rules overseen by both agencies are outdated. Over the past several decades, retail investment products have become far more complicated, and with 401(k)’s and Individual Retirement Accounts replacing the defined-benefit pensions of old, responsibility has shifted from employers onto the shoulders of workers and retirees. This combination of trends has greatly increased the power of financial advisors to influence people’s fortunes for good or ill.
Nowadays, brokers frequently act as advisors, providing “investment planning” or “retirement planning” expertise; yet the SEC continues to define and regulate them as salespeople. The Labor Department sets a stricter standard for some forms of advice, but its rules, which have not been updated in 40 years, are narrow, excluding many of the situations that matter most, such as advice given to employees about what to do with their 401(k) money when they retire or change jobs. Far too often, the record shows, financial professionals take advantage of the wiggle room between perception and regulation to promote high-commission investment products over alternatives with lower fees, better returns or fewer risks.
The Dodd-Frank Act of 2010 empowered the SEC to establish a fiduciary standard for all professionals who give investment advice. But the commission has moved slowly, and has yet to indicate when it will act, if it does. The Department of Labor, by contrast, has made the issue a priority, and now appears to be on the brink of using its authority to issue tougher rules for a broader range of circumstances than its current regulations cover.
That prospect, however, has stirred fierce resistance from broker-dealers and other elements of the financial industry seeking to preserve a highly profitable status quo. They are working hard to convince anyone who will listen, including elected officials, that a fiduciary standard would prevent them from being fairly compensated for giving advice. That, they argue, would make it impractical for them to share their expertise with any but high-income clients, leaving middle-income workers and retirees to negotiate these dangerous waters without any guidance.
But the premise is false. The rulemakers have made it clear that a fiduciary standard need not and would not keep brokers from being properly compensated. Moreover, we have a record of experience to show us that it does not have that effect. California, Missouri, South Dakota and South Carolina have already imposed a broad fiduciary-duty standard; in all four states, brokers continue to be paid for their services, and they continue to offer them to clients up and down the income ladder.
What’s at stake, then, is not whether some clients will be able to get advice, but whether some financial professionals will be allowed to profit by giving bad, self-serving advice. And there is abundant evidence of misrepresentation and obfuscation under the current rules.
A 2013 report by the Government Accountability Office cited many examples of financial advisors aggressively encouraging people to roll their 401(k) funds over into IRAs, often with only minimal knowledge of a client’s financial situation. Call-center representatives, the report showed, frequently claimed that 401(k) plans had extra fees, while IRA’s “were free or had no fees,” when, in fact, IRAs are usually the more expensive choice. In many cases, advisors made rollovers more attractive by offering to fill out the paperwork for customers, or by providing a cash bonus for opening an IRA. Some investment firms, according to the GAO report, offered financial or other incentives to advisors who successfully convinced people to accept a rollover.
Brokers can also face intense pressure from their employers to sell in-house products, regardless of whether they serve an investor’s best interests. At JPMorgan Chase, employees who resisted that kind of pressure were “told to change their tactics or be pushed out,” according to a March 2013 article in the New York Times.
In today’s world, workers and retirees face investment decisions that are, at once, deeply confusing and crucially important. In the absence of fiduciary standards, many people will put their trust in salespeople masquerading as trustworthy financial advisors. And many will make huge mistakes as a result – mistakes that can cost tens or even hundreds of thousands of dollars over a lifetime. A disproportionate share of those costs, moreover, will be borne by the middle-income workers whose welfare the brokers and their spokespeople claim to be concerned about.
It should be noted that we are talking, to a large extent, about taxpayer-subsidized retirement accounts. The point of the subsidies is to help people save for a secure retirement and get the maximum value out of the money they set aside, not to produce a windfall for financial professionals. (Employers, according to a recent AARP survey, overwhelming support the concept of a fiduciary duty standard for all those who advise workers on 401(k)-related decisions.)
This one simple step has the potential to deliver large benefits to retirees and investors. It is also, very plainly, the right thing to do. When retail investors seek advice from a financial professional, they generally assume that the professional is acting on their behalf. It makes no sense to insist that some professionals live up to that expectation, while letting others exploit it.