News Journal: Is the financial industry looking out for you?

Have you ever seen an ad for a bank, a brokerage house, or any other institution offering financial advice that didn’t claim its single most important objective was to serve the needs of its clients?

You never have and you never will. That’s what makes the current controversy over a new regulation proposed by the Labor Department nearly laughable. I say nearly because what’s involved is the retirement savings of millions of Americans, and that’s no laughing matter.

Since ERISA became law in 1974, the Department of Labor has been authorized to protect tax-preferred retirement savings. Its new rule would require brokers handling retirement accounts to act in the best interests of their clients.

Huh? Are you surprised that isn’t the case already? Are you even more surprised that the financial community – you know, the people who run those warm and fuzzy commercials about how much they love you – are fighting the new regulation tooth and nail?

I quote from the Labor Department’s fact sheet on the new regulation: “The basic rules governing retirement investment advice have not been meaningfully changed since 1975, despite the dramatic shift in our private retirement system away from defined benefit plans and into self-directed IRAs and 401(k)s. That shift means good investment advice is more important than ever…

“Today large loopholes in the definition of retirement investment advice under outdated DOL rules expose many middle-class families, and especially IRA owners, to advice that may not be in their best interest. Under DOL’s proposed definition, any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor (e.g., an employer with a retirement plan), plan participant, or IRA owner for consideration in making a retirement investment decision is a fiduciary…

“Being a fiduciary simply means that the adviser must provide impartial advice in their client’s best interest and cannot accept any payments creating conflicts of interest unless they qualify for an exemption intended to assure that the customer is adequately protected. DOL’s regulatory impact analysis estimates that the rule and related exemptions would save investors over $40 billion over ten years, even if one focuses on just one subset of transactions that have been the most studied. The real savings from this proposal are likely much larger as conflicts and their effects are both pervasive and well hidden.”

SEC Chair Mary Jo White recently announced that her agency may soon propose new rules that would go even further and require that brokers “recommend financial products solely in the best interest of their clients whenever they give advice to mom-and-pop retail investors, not just when they give retirement advice.”

What’s Wall Street’s reaction? Some of the biggest names in the financial industry are leading the opposition, all in high dudgeon. “They view the entire industry as conflicted and self-dealing,” harrumphed Francis Creighton, head of government affairs at the Financial Services Roundtable. “It impugns the integrity of an entire sector of the economy,” said Ken Bentsen of the Securities Industry and Financial Markets Association, who went on to say that if the fiduciary rule is extended to brokers they could no longer afford to handle small investors’ retirement accounts.

I don’t think the Labor Department views the entire industry as conflicted, but does anyone seriously question that some brokers, dependent on commissions, have conflicts on interest when it comes to offering clients’ advice? And if individual brokers choose not to handle small investors’ accounts because they can no longer gouge them with fees, that strikes me as good news. They will still have access to low-cost advisory services offered by firms like Vanguard and Fidelity.

So the battle lines have been drawn, with a number of consumer groups lined up against the powerful Wall Street lobby. I don’t know who will win. But I’ll close with a quote I found in The Huffington Post, because it seems to me a financial advisor named Helaine Olen got it exactly right:

“The financial services industry likes to claim that if they need to work in the best interests of their customers, they can’t afford to serve them. Think about that for a moment.”

Ted Kaufman is a former U.S. Senator from Delaware.

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