Millions of Americans are struggling to save what they can for retirement. But because of conflicted advice, they may not be getting the most out of the money they’ve earmarked for their future. People who’ve invested their money based on the recommendations of advisers who receive commissions or or other hidden payments could be losing tens of thousands of dollars in retirement savings, the White House claims. Overall, the losses from bad retirement advice cost working and middle class families $17 billion every year, according to a report from the president’s Council of Economic Advisers.
The origin of the problem is simple. Not all people who give retirement advice have to follow the same rules. Some are permitted to point you to more expensive investments that earn them more money, provided those investments are suitable to your situation. Other advisers always have to put your best interest first. While 401(k) retirement plan advisers are held to the stricter standard, not everyone who offers advice about IRAs must meet the same level of objectivity. When people leave a job and roll over their 401(k) assets to an IRA, they often end up turning to an adviser who may be offering conflicted advice.
“If you are working hard, if you are putting away money … you should have the peace of mind of knowing that the advice you’re getting for investing those dollars is sound, that your investments are protected, that you’re not being taken advantage of,” said President Obama when speaking to the AARP on the issue of conflicted financial advice in February. “Right now there are no uniform rules of the road that require retirement advisors to act in the best interest of their clients, and that’s hurting millions of working and middle class families.”
How much could conflicted advice be costing you?
How much could getting conflicted advice cost you personally? At first glance, the numbers don’t seem that bad. Investors who receive conflicted advice can expect annual returns about 1% lower than they would otherwise. But when it comes to investing, 1% is a lot, especially as your losses add up over time. “Instead of a $10,000 retirement investment growing to more than $38,000 over that [35-year] period after adjusting for inflation, it would be just over $27,500,” the White House explains. “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,” claims the Council of Economic Advisers (CEA) report.
Consumers are often surprised when they discover that their adviser isn’t already required to put the best interests of his clients before his own. Yet unless you’re working with someone who adherers to the fiduciary standard, like a registered investment adviser, the advice you’re getting may be conflicted. Many providers of investment advice, including stockbrokers, are only subject to what is called the suitability standard. A broker subject to the suitability standard is free to recommend the investment that earns him the biggest commissions or a high-fee product offered by his employer, provided that it is broadly appropriate for your situation.
Advisers who are subject to the fiduciary standard, on the other hand, are legally required to put a client’s interest before their own, recommending only the best possible products for you. If you’re paying your adviser directly for their advice, either on an hourly fee basis or a percentage of your total assets they manage, there’s a good chance your adviser is a fiduciary.
Sound confusing? It is. Ninety-seven percent of brokers and advisers said their clients didn’t understand that there was a difference between brokers held to the suitability standard and investment advisers held to the more rigorous fiduciary standard, a 2012 survey by Fi360-AdvisorOne found.
The goal: holding all retirement advisers to the same standard
The Obama administration has proposed a solution that would reduce some of the confusion about financial advice: make everyone who gives advice about retirement investments subject to the fiduciary standard. The Department of Labor is planning to “move forward with a proposed rulemaking that would require retirement advisers to abide by a ‘fiduciary’ standard — putting their clients’ best interest before their own profits,” the White House said.
That sounds like a long overdue change to many consumer advocates, who argue that anyone giving financial advice to consumers should be subject to the fiduciary standard. “We don’t ask patients to wonder if their doctors are recommending one sort of treatment over another because they have a financial stake in it,” wrote Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, in The Guardian.
Certain people in the financial industry — especially those who currently make their money via commissions and similar payments — feel otherwise. Industry organizations like the Securities Industry and Financial Markets Association (SIFMA) argue that brokers are already highly regulated, and that additional regulations would actually harm Americans, making saving for retirement more expensive and reducing the choices available to investors.
“This proposal … has the potential to cause a detrimental impact on all American savers and the retirement system as a whole,” said SIFMA president and CEO Kenneth Bentsen in a statement. These industry advocates argue that most advisers can’t afford to provide fiduciary advice to clients, especially those with smaller account balances. Supporters of an expanded fiduciary rule disagree. Nearly 65% of advisers surveyed by fi360-AdvisorOne felt that regulations requiring brokers to adhere to a fiduciary standard would not reduce the choices available to investors.
Debate over changes to the way retirement advisers are regulated is likely to continue for some time. In the next few months, the Department of Labor plans to release the proposed rule for public comment. A final rule won’t be issued until after the public comment period ends, and even then any new rule won’t take effect immediately.