You might assume that your financial adviser, who recommends funds for your Individual Retirement Account or the 401(k) account you have through your employer, looks out for your best interests. And many do.
But enough of them don’t that U.S. consumers investing for their retirements lost about $17 billion last year in fees and costs attached to funds that were recommended to them not because they were the best fit but because they scored the financial adviser a better sales commission or higher fees, according to the White House Council of Economic Advisers.
Under current rules, financial advisers need only recommend a “suitable” investment, regardless of the size of the commission the adviser can make selling the fund, which can range from between 1 percent and 10 percent. Financial advisers might steer a consumer to a fund that offers a lower return or higher risk but a better commission for the adviser.
U.S. Secretary of Labor Tom Perez, in announcing a new fiduciary rule last week, said financial advisers’ promises about “putting clients first” will now be a requirement, not just a slogan.
The new rule matters to anyone investing for their retirement but could make the biggest difference for young workers who are just starting to build their accounts.
The cost of fees from “conflicted advice” might not be noticeable to many when they check their statements, maybe 1 percent each year. But the cost of the fees, which eat into the investments themselves, can mean a loss of thousands of dollars over time, as much as a 25 percent loss in an account’s value over 35 years, the Council of Economic Advisers said in a study that was the impetus for the new rules.
Especially susceptible are those who roll over money from a 401(k) or IRA into a new fund, which often happens when taking a new job. Seizing an opportunity, the industry aggressively markets roll-overs, again without having to consider the best interests of the consumer.
Opponents of the rule change, in particular the National Association of Insurance and Financial Advisers, have said the rule will discourage advisers from working with small- and moderate-income investors, those who are most in need of guidance. In an interview with National Public Radio last week, the association’s president, Jules Gaudereau, said its members already subscribe to a code of ethics that affirms their pledge to work in each consumer’s best interests.
But pledges don’t offer the guarantee of compliance that rules do.
U.S. Senate Democrats on the Health, Education, Labor and Pensions Committee, of which Washington state’s Sen. Patty Murray is the ranking Democrat, praised the rule change and played down concerns that fewer advisers would be willing to work with small- and moderate-income investors. Many financial firms do support the new rule, a statement from the committee’s minority staff said, and already are making changes to offer services and funds that perform well and only charge an initial low-cost fee.
While the rule change is final, it won’t take effect until early 2018. And Gaudereau told NPR that his organization plans to challenge the rule and will seek legislation in Congress.
Workers have increasingly had to take a greater role in providing for their retirement. To encourage workers to set aside more for retirement and to protect the money they’ve earned and invested, consumers need the assurance of rules — not just a pledge — that their advisers are looking out for their best interests.
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