The White House wants Wall Street to put your interests first when offering retirement planning advice. Wall Street insists it shouldn't have to. If you take investment suggestions from a pro, read this.
On Monday, President Obama directed the Labor Department to force Wall Street advisers to treat you fairly, at least when it comes to advising you on your retirement money.
Not very controversial, right? Who could possibly object to people who make their living advising others to be required to do an honest job?
As it turns out, Wall Street objects. Yes, the same Wall Street that taxpayers bailed out when the economy collapsed. Some on Wall Street apparently don’t believe the advisers they employ should have to put your interests ahead of their own, and they’re prepared to fight to keep it from happening.
A battle that’s been going on for years
In 2010 I wrote a story called New Rule: Advisers Must Give Honest Advice. It was about a rule being proposed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The language of the law basically would have required professional investment advisers to offer you honest, objective advice by adopting something called the fiduciary standard.
That part of the law, however, wasn’t included in the final bill. Instead, it directed the Securities and Exchange Commission to study the issue for six months, then act according to the results of its study.
Fast-forward five years: Nothing has happened. Investment advisers are still not required to put your interests ahead of their own. So yesterday the president stepped in and directed the Department of Labor, which oversees retirement accounts, to ensure that Main Street investors like you and me are at least getting a fair shake when it comes to our retirement accounts.
Here’s the beef
Most Wall Street advisers are not required to act as fiduciaries, meaning they are not required to place your financial interests ahead of their own. Instead, they adhere to a lesser standard of conduct, known as suitability. Suitability requires only that they suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.
An example to illustrate the distinction: Suppose your goals and risk tolerance suggest that a stock mutual fund is right for you. There are two similar funds available. One charges you a 5 percent commission, the other 2 percent. A fiduciary would be required by law to suggest the fund with the lower cost, because that’s obviously in your best interests. The suitability standard, on the other hand, allows advisers to suggest the fund that pays them the higher commission, because either fund is suitable.
The simple truth: A system built on commissions and without fiduciary standards invites abuse. That was true when I started as a stockbroker 34 years ago, and it’s true today.
How much is this costing you?
When advisers can legally advise you based on what they earn in commissions, that obviously makes them and their employer richer, but does so at your expense. How much does it cost? In a report released today, the White House Council of Economic Advisers suggested the cost was about 1 percent each year, or a total of $17 billion annually.
Who cares about a measly 1 percent? You’d better.