When the stock market plummeted in early December, erasing virtually all the gains that Americans had realized in their 401(k)s and other investments over the previous 11 months, many people came to the painful realization that when it comes to financial matters they really don’t know what they’re doing.
Many Americans know they need financial education and good, conflict-free financial advice. They just don’t know where to get it. There are lots of companies creating financial products, as you can see if you watch any of the cable or network news programs, but it’s unclear to many people which of those many offerings is right for them.
Certainly they can ask the “financial advisor” at their local bank branch but they might not understand that person is a broker or salesman whose compensation depends on selling the bank’s proprietary investment products, not the quality of advice they offer. Regardless of the title on their business cards, these individuals owe their first loyalty to their employers, not clients.
“It has long been recognized that many investors do not have a firm grasp of the important differences between [brokers] and [investment advisors],” SEC chairman Jay Clayton said at the April open meeting. “This investor confusion could cause investor harm if investors fail to select the type of service that is appropriate for their needs, or if conflicts of interest are not adequately understood and addressed.”
This confusion about the role of the individual on the other side of the desk can be especially damaging when it comes to retirement savings. The advent of the 401(k) plan put everyone in charge of their own retirement destiny and unfortunately, many of us are just not up to the task.
The Department of Labor tried to address that during the Obama administration by drawing up a rule that would require anyone connected with a 401(k) plan to act foremost in the best interest of their clients. After extensive public comment, that rule was scheduled to be phased in between April 2017 and January 2018, but that those dates have long since passed and we’re still in the same position.
Upon taking office, President Trump asked for a review of the DOL fiduciary rule, which pushed implementation back even further, until July 2019. Then the Fifth Circuit Court of Appeals weighed in and vacated the rule entirely due to its “unreasonableness,” labeling the DOL’s attempt to be “an arbitrary and capricious exercise of administrative power.”
The SEC then offered its own solution—a fiduciary standard for advisors and a best-interest standard for brokers. Among the SEC’s proposals is Reg BI (Best Interest), intended to ensure that SEC-registered advisors and brokers act in the best interest of clients. The problem that many see with this is that under Reg BI, brokers would still be allowed to operate under business models that allow them to receive compensation for selling certain financial products, as long as those conflicts are mitigated by disclosure to clients.
Another provision would prohibit brokers from calling themselves “advisor” or “adviser” unless they are also registered as such with the SEC. But, even if that rule is enacted, there’s no guarantee that consumers would have any better understanding about who they’re dealing with.
This is about a lot more than the meaning of the terms advisor and broker, because there’s real money and people’s ability to live comfortably in retirement at stake. A report prepared by President Obama’s Council of Economic Advisors found that “an investor receiving conflicted advice who expects to retire in 30 years loses at least 5 to 10 percent of his or her potential retirement savings due to conflicts, or approximately 1 to 3 years’ worth of withdrawals during retirement” and that potential investor losses could be as high as $8 to $17 billion per year.
And after DOL rule was first delayed, a press release from Americans for Financial Reform noted that, “Every day that conflicted advice continues costs them [Americans] $46 million a day, $1.9 million per hour, and $532 a second.”
The final version of the SEC’s best interest and fiduciary standards are both scheduled for release in September 2019. That sounds promising, but we’ve heard that kind of talk before. In the meantime, American financial consumers who desperately desire unbiased financial advice are left wondering where to turn.