If accomplished, the Department of Labor's new fiduciary rules could be a much needed game-changer.
According to the Government Accounting Offices 2014 report, in 2011 (the most recent year available) 43 million taxpayers had IRAs with a total reported fair market value of over $5 trillion. And, per the American Benefits Council, 88 million taxpayers had defined contribution accounts, totaling $4.5 trillion in 2013.
More than at any other time in our history, Americans are faced with the challenge of saving and investing well for their own future retirement security. Our citizens are faced with myriad investment choices in an increasingly complex financial world. Unable to comprehend the jargon of finance, the lengthy disclosures provided to consumers are usually unread, and even if read rarely understood. Financial literacy efforts cannot overcome the innate limits on disclosure in such a vast gulf of complexity. We can no more create expert consumers of financial products and services than we can transform these same consumers into brain surgeons.
The result of the marketplace of today should not be surprising. Into this arena, where such vast information asymmetry exists, come those who seek to prey upon their fellow Americans, selling often high-risk and expensive products. Excessive rents are extracted. Not in the manner of Ponzi schemes, but by the even more devilish leaky faucet in which a significant portion of the returns of the capital markets are diverted away from Main Street investors and into the arms of Wall Street and the insurance companies. Billions, if not tens of billions, are unnecessarily diverted from the retirement accounts of Americans each year. Time substantially compounds the problem, leaving our neighbors with insufficient funds to finance their retirement.
Plan sponsors are often advised by retirement plan consultants who hide behind the low suitability standard. Yet, when plan sponsors are held accountable, as fiduciaries, for the investment choices provided in defined contribution plans, these non-fiduciary consultants are rarely liable. Business owners both large and small remain at risk under the current system.
Change is desperately needed. Our fellow Americans deserve better financial futures. America itself, facing an era where more and more citizens without adequate financial resources will seek assistance from local, state and federal governments (precisely at a time when such governments are already strained), needs the fiduciary standard. Small business owners deserve to be advised by and rely upon trusted fiduciary advisors.
This is also a critical moment for those who desire a true profession for investment and financial advisors, bound together under a bona fide fiduciary standard of conduct. We can applaud the courageous perseverance of Assistant Secretary Phyllis Borzi and her team at the Employee Benefits Security Administration, as well as the efforts of many professional organizations and consumer groups, for bringing the conflict of interest rule this far. Yet, these advocates are woefully outgunned by hordes of Wall Street lobbyists. Now is the time to act.
We must convey to our U.S. Senators and U.S. Representatives, to the Secretary of Labor, and to the White House, the huge importance of this proposal. We must push pack against the untruths proffered by Wall Streets influential lobbyists. We must act now, to lay the foundation for a true profession of fiduciary investment and financial advisors, dedicated to the service of our fellow Americans, and granted by consumers the very attributes of trust and expert-level compensation which skilled professionals so justly deserve.
Professor Ron A. Rhoades is a lawyer, investment adviser, and Certified Financial Planner. In July 2015 he will join the Finance faculty at Western Kentucky University, where he will chair its Financial Planning Program.
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