A Presidential Announcement that Should Give Brokers Pause

by Mark Hebner and IFA Contributors - Thursday, 26 February, 2015

A few weeks ago, we published this article about a White House memo in which the Chairman of the Council of Economic Advisers (Jason Furman) recommended that brokers who service retirement accounts be legally required to apply a fiduciary standard of care. On Monday (2/23/2015), President Obama announced in a speech at AARP headquarters that it would now be official White House policy to push for new rules to require financial advisers to put their client’s interests above their own, particularly for retirement savings plans.

“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,” Obama said. The White House Website posted the video below to illustrate this point.

President Obama quoted the memo when he said that Americans are losing as much as $17 billion a year in savings because of “bad advice that results from conflicts of interest.” He also stated that these conflicts of interest result in annual losses of about one percentage point for affected persons who can lose over a quarter of their savings over a 35-year period. He also cited a study that we wrote about here in which the researchers set up 284 contrived visits to financial advisers and found that half of them recommended high-cost active funds while less than 8% recommended index funds.

To summarize, as it is stated here on whitehouse.gov,

“Today, the President is directing the Department of Labor to crack down on Wall Street to protect families from conflicted retirement advice. That would kick off a rulemaking process that would require all retirement advisors to abide by a ‘fiduciary,’ or trust standard. In short, that means they'd be required to put their client's best interest before their own profits.”

The next step is that the Department of Labor will issue a “notice of proposed rulemaking” and will solicit feedback from the public. While the Department of Labor and President Obama could seek to impose new investment rules on their own, Republicans in the House and Senate could take action to block any changes. There already appears to be some industry opposition such as Kenneth E. Bentsen Jr., President and CEO of the Securities Industry and Financial Markets Association, who said the plan “could ultimately raise the cost of saving and hurt all Americans trying to save for retirement, particularly middle-class workers.”

We at Index Fund Advisors will continue to watch these developments quite closely. While we would like to see all American investors served with a fiduciary standard of care, we recognize that the heavy hand of government may not be the best way to bring this about. While fiduciary advice in all 401(k) plans is a desirable outcome that may require regulation, we would rather see industry self-imposed regulation over government regulation. The responsibility is on the plan trustees to become educated on the benefits of a fiduciary.