Can New Rules Keep Financial Advisers on Your Side?

Rules being debated on Capitol Hill could affect your retirement investments.

Better Investing


A heated debate that could affect the retirement savings of millions of Americans is coming to a head on Capitol Hill.

Public hearings Aug. 10-13 will focus on a Department of Labor Employee Benefits Security Administration rule that would require financial advisers to put your interests ahead of theirs when it comes to investing your retirement savings.

President Obama outlined the problem in a speech at the American Association of Retired Persons (AARP) in February when he called for changes in the rules:

[T]he challenge we’ve got is right now, there are no uniform rules of the road that require retirement advisers to act in the best interests of their clients — and that’s hurting millions of working and middle-class families. There are a lot of very fine financial advisers out there, but there are also financial advisers who receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns. 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.

According to the president, this skewed financial advice is costing ordinary Americans some $17 billion a year.

The Labor Department has received more than 1,000 comments, requests and petitions ahead of the public hearing on creating a rule assigning advisers a fiduciary status when they pitch you investments for your 401(k) or Individual Retirement Account (IRA).

First proposed in 2010, such a rule has been a long time coming, but opponents call it unworkable.

“Professional advisers often are compensated in ways that create conflicts of interest, which can bias the investment advice that some render and erode plan and IRA investment results,” says the Labor Department.

In other words, are advisers looking out for their sales fees and commissions more than they are looking out for your best interest? Current rules only require that they find you suitable investments that meet your risk tolerance and investment goals.

“Unfortunately,” says Brookings Institute Senior Fellow Gary Burtless, “there is a great deal of evidence workers do not know much about investing.” Financial advisers play an increasingly important role in the future of Americans saving for retirement. Brookings recently released a series of papers on the topic.

The Labor Department warns that retiring baby boomers in the next five years will roll over $2.5 trillion from 401(k)s to IRAs. An investor could “lose 12 to 24 percent of the value of her savings over 30 years of retirement by accepting advice from a conflicted financial adviser.”

Support and opposition to the proposed regulation depends on the source, as Brookings points out.

For example, Marcia Asquith, senior vice president and corporate secretary of the Financial Industry Regulatory Authority, which regulates brokers and dealers (Wall Street), wrote in a 21-page letter that her group supported the proposal’s goals but not the rules as written.

“The proposal would impose a best interest standard on broker-dealers that differs significantly from the fiduciary standard applicable to investment advisers … and it would impose the best interest standard only on retirement accounts,” Asquith wrote in the July 17 comment letter. “This fractured approach will confuse retirement investors, financial institutions and advisers.”

The Financial Planning Coalition, representing 80,000 financial planners, in a 35-page letter, called the proposal not only overdue but “both workable and essential.”

In response to the rules, “financial institutions and advisers will devise new tools and strategies — assisted by modern software and new technology-based tools — to accommodate even those with only a few thousand dollars to invest,” the coalition predicted.

Many Republicans and some Democrats in Congress oppose the regulation and want the Labor Department to try a rewrite. They threaten to hold up funding for enforcement of the new rule, if it is adopted. Others, such Sen. Elizabeth Warren, D-Mass., support it.

Do you feel confident in the way your retirement savings are being invested? Share your thoughts in comments below or on our Facebook page.

Stacy Johnson

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