By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
At the risk of self-promotion, allow me to point you in the direction of a piece by me running today in The New Republic. It’s about a proposed update to the Department of Labor’s fiduciary rule, and how the financial services industry, along with members of both parties, are working to stop it. An excerpt:
The Labor Department proposal, known as the “fiduciary rule,” would change the ethical standards by which employer-based retirement products like 401(k)’s and IRAs are marketed and sold. The rule has not been updated since 1975, before 401(k)’s and IRAs even existed. The Labor Department wants to broaden the definition of a “fiduciary” to cover all financial advisers who offer individual investment advice for a fee. Under the rule, they would be legally required to work in the best interest of their clients. For example, a fiduciary would not be able to push investment products on customers in which they have a financial stake…
Currently, it is depressingly common for financial advisers, more than 80 percent of whom are not fiduciaries, to self-deal when offering advice. First off, they obtain large fees from the retirement products they sell. According to the think tank Demos, a median-income, two-earner household will pay $155,000 during their lifetime to financial advisers on average. (The lifetime gains for two-earner households from retirement accounts are around $230,000, meaning that nearly two-thirds of the profits go to the industry.) Second, non-fiduciary financial advisers can enjoy kickbacks; right now there is no rule against an adviser from a mutual fund company encouraging clients to put their money in specific funds sold by that company. In fact, that’s the norm, and the adviser typically receives a commission for the sale.
Conflicts of interest like this cost retirement investors at least $1 billion a month, because the funds they get channeled into underperform the alternatives. Financial advisers also encourage rollovers into high-cost IRAs when an individual changes jobs. None of these schemes have to be disclosed to the customer, under the current standard. The National Bureau for Economic Research found in a recent study that “adviser self‐interest plays an important role in generating advice that is not in the best interest of the clients.”
As they say, read the whole thing. This is all a function of throwing our retirement security into the hands of financial industry personnel who can’t help but use it as a rent-extraction opportunity. The solution isn’t to try to regulate that process per se, but to expand Social Security and return to defined-benefit pensions rather than to spend hundreds of billions every year in tax preferences for retirement accounts, effectively having the federal government act as an accessory to the thievery. But the absolute least we can do is create standards so that the advice millions of Americans get on their retirement money does not come from anyone looking to rob them.
This, like so many things when it comes to Wall Street, is a bipartisan problem. The House Financial Services Committee vote on H.R. 2374, the Retail Investor Protection Act (it does the opposite, delaying the Labor Department’s proposed rule and actually making it impossible to enact) was 44-13, with broad support from Republicans and Democrats. The bill could hit the floor this week, even with the shutdown.
The two major arguments by the industry, in an effort to protect their predatory fees and prevent being mandated to act in their clients’ best interest, are completely contradictory. First, they say they merely offer advice to low-level investors as charity, and the institutional investor accounts subsidize this service for small investors. At the same time, they argue that if the fiduciary rule goes through, they’d have to cut off all their products for small investors because they wouldn’t be able to afford the services. This makes no sense at all. If advice to small investors is unprofitable, why would they have to abandon it based on affordability? Multiple Hill staffers pointed out this contradiction to me for the piece.
This didn’t make it in the article, but it turns out that the intellectual foundation for the industry’s claims comes from a study by the financial consulting firm Oliver Wyman. The study, which claimed to use data from 12 different financial services firms, concluded that the industry would have to modify its offerings if faced with the new fiduciary rule, and that investors would have to pay higher direct costs for financial advice.
The less-told story here is that nearly two years ago, the Labor Department asked Oliver Wyman for the underlying dataset used to form their assertions. And Wyman’s lawyers, Davis and Harman LLP, refused the request from a federal agency. They cited confidentiality agreements with the financial services firms. It took a second request for Wyman to give up the aggregate data, while continuing to withhold the selection criteria for the data. Without that selection criteria, the study is open to claims of cherry-picking in the data.
Given all the tricks and self-dealing from this industry, an allegedly “independent” study that refuses to release the context for its claims is mostly worthless. Moreover, even if you were to take the Wyman study on its own terms, it claims that non-fiduciary advice is valuable, so valuable that brokers could not offer it to small investors if the costs became too burdensome. This directly contradicts the secondary argument, that the industry makes more than enough money off large investors, almost all of whom have a fiduciary arrangement, so they can float cheap advice to the smaller retirement account holders. It’s pretzel logic.
This is a huge deal. The retirement crisis will become one of the bigger stories of the next decade as the baby boomers turn 65. Millions of people are being systematically ripped off and sold a bill of goods about how they can maintain their standard of living after they stop working. And politicians in both parties want to keep allowing the financial industry to perform this deceitful game. While the true solution, as said before, is a total revolution in thinking about retirement, protecting ordinary investors and ending the rent-extraction from worthless intermediaries is at least a start. This one is worth a call to your Congresscritter.