Obama: Bad Investment Advice Costing Older Americans $17 Billion Annually

President Obama is calling for tougher restrictions on investment brokers handling trillions of dollars in 401k and other retirement savings accounts, in order to curtail hidden fees and protect consumers against biased financial advice.

On February 23, 2015, the U.S. Labor Department submitted a proposal to the White House Office of Management and Budget that would hold brokers to a fiduciary standard, which mandates that they place their clients’ interest above their own.

Currently brokers are held to a suitability standard that enables them to sell “suitable” rather than cost-effective products. Brokers typically earn money from sales commissions or fees paid by investors who purchase mutual funds. This compensation arrangement often incentivizes agents to recommend products with higher fees or commission without better returns for investors.

According to the White House Council of Economic Advisers, clients lose a combined $17 billion a year from such conflicting financial dealings and advice.

“The corrosive power of fine print, hidden fees and conflicted advice can eat away like a chronic illness at people’s hard-earned retirement savings,” said Labor Secretary Tom Perez.

The Labor Department’s proposal would also require brokers to disclose any fees or payments they collect for endorsing certain investments.

"We expect that the proposed rule will not ban commissions or any common compensation practices, and it will allow financial advisers to continue providing general education on retirement savings," said Perez.

Successful Wall Street lobbying efforts forced the Labor Department to withdraw its first draft of the plan in 2011. Opponents of the proposed reform fear the change will reduce compensation for brokers and limit the investment products that investors have access to.

"This re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers," said Ken Bentsen, president of the Securities Industry and Financial Markets Association, a lobbying group representing banks and assets managers.

Another argument is that the Securities and Exchange Commission (SEC) should be the government entity proposing such rules. Although the SEC has for years considered implementing its own fiduciary rule for retail brokers and advisers, it has not determined whether new rules are necessary.

More than 40 million American families collective have more than $7 trillion in IRAs and more than 75 million families have an employer-based retirement plan, own an IRA, or both, according the White House report “The Effects of Conflicted Investment Advice on Retirement Savings” released in February 2015.

Photo Courtesy of Wikimedia Commons.

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