If We Can’t Give Small Investors Bad Advice, We Won’t Give Them Any

May 12, 2015

Eileen Appelbaum

That, it seems, is the official position taken by financial professionals in response to new rules proposed by the Obama Administration to require financial advisors to put workers’ interests ahead of their own when providing advice on where to invest retirement savings.

The Labor Department, which oversees 401(k), IRA, and similar accounts, has proposed closing loopholes in the current regulations that allow plan advisors and brokers to take into account what they will earn in fees and commissions when providing financial advice to workers. Workers are especially vulnerable to getting bad advice when they roll over funds from a 401(k) or similar account into an IRA and need guidance on what, for many, is the most significant financial decision they will make. Under current regulations, financial advisors can put their commissions ahead of workers’ best interests when they provide this guidance. The result is that workers may not end up in the most advantageous investments and may pay excessive fees that cut into their savings, a double whammy that the White House estimates costs employees $17 billion annually.

Individual savers are increasingly responsible for providing the income they will need during retirement. Fewer and fewer employers offer traditional pensions; workers lucky enough to have a 401(k) or similar retirement savings account where they work have been doing their best to save for their old age. Today these plans contain about $11 trillion in assets.

What can possibly be the objection to closing the loophole that allows financial advisors to put their personal gain above the interests of individual savers when making recommendations for investing these roll over funds? Here’s what the financial services industry has to say:

  • Any change to the current DOL rules for investment advisors will limit workers access to professional retirement planning and guidance—presumably by not letting workers seek advice from advisors who won’t agree to look out for their best interests.

  • Financial industry trade groups are concerned that if the new DOL rules restrict the advice that financial advisors can give to those investments that are in the best interests of workers with retirement savings, this “will severely limit compensation for brokers who sell individual retirement accounts, and [they] argue that it will prevent brokers from working with middle-income investors.”

  • Wall Street groups like the Securities Industry and Financial Markets Association worry “that the rules may make it uneconomical for brokers to serve lower-balance accounts such as those of mom-and-pop investors.”

So there you have it, straight from the horse’s mouth. If the financial investment advisors and brokers can’t line their pockets at the expense of ordinary people saving for their retirement, why then they will refuse to provide financial advice to these middle-income investors.

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