The majority of financial advisors, registered reps, life insurance agents and others entrusted with the retirement savings of consumers go to work each day confident theyre doing whats best for their clients. But many of them, whether knowingly or not, are also taking advantage of an outdated regulatory framework that places retirement savers at risk of financial loss.
By directing the Department of Labor to update the 40-year-old rule defining the fiduciary standard for retirement savings under ERISA, the Obama administration has signaled support both for consumers and for the financial professionals who place their clients interests above their own. NAPFA looks forward to reviewing and commenting on the updated rule proposal once its published for public comment.
For the members of NAPFA, support for such a revision is a no-brainer. Members already abide by a strict fiduciary oath and code of ethics, which require disclosure of any conflicts of interests and prohibit any compensation associated with the sale of financial products. NAPFA has long advocated that all those who call themselves financial advisors be held to a similar standard.
Closing loopholes and eliminating misleading and harmful conflicts of interests will certainly benefit consumers, who lose precious savings when they receive advice to purchase investments with high fees, low returns or excessive risks.
In fact, one recent estimate from the White House Council of Economic Advisors put the total amount of retirement savings lost as a result of this practice at $17 billion annually. (Thats equal to 1% of the $17 trillion estimated to be invested in retirement savings that involve conflicts of interest.) Low- and middle-income consumers who have small accounts stand to benefit the most from a revised fiduciary standard that would help to put this money back in their pockets.
NAPFA also recognizes that true change will require more than simply modifying regulatory definitions. Both consumers and those who work in the financial industry must recognize that acting solely in a clients best interests benefits everyone, and that having a clearly articulated fiduciary standard is the best way to accomplish this.
Old habits die hard. If we could create an advisory business model from scratch that helped people be financially secure, it would certainly follow the fiduciary standard from the get-go. Instead, we have a complex industry enslaved to entrenched (and often incorrect) ideas. Job preservation is at the top of mind for many of those who have been on the propaganda treadmill for so long that they cant see the deficiencies in their business model.
There are tens of thousands of registered reps and life insurance agents who believe theyre doing the right thing for their clients. Their job descriptions encompass a range of impressive-sounding (but confusing and often misleading) titles, such as financial advisor and financial planner. Their camp opposes a fiduciary standard, and it encourages them to think that registered investment advisors who dont subscribe to their business model are unprepared to help consumers.
This divide within the financial industry creates confusion that ultimately puts the financial security of everyday consumers at risk. An updated fiduciary standard under ERISA will help to address this disparity and stimulate dialogue for change within the industry.
Dave OBrien is chairman of the public policy committee of NAPFA; Geoffrey Brown is CEO.
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