Op-ed: Moving Your Nest Egg to a Bed of Red Tape
The Labor Department has proposed a regulation—championed by President Obama and Sen. Elizabeth Warren (D., Mass.)—that would subject financial retirement advisers to a strict “fiduciary” standard for their services. The proposal rests on a claim that many advisers serve their own interests, not those of their customers. However, as in any successful business in a competitive market, financial professionals must build trust with their customers over years of working together. Advisers who get a bad name promoting their own self-interest by jeopardizing their clients’ money can’t stay in business long.
Washington’s plan is put forth as a way to help people saving for retirement. Instead, it would hurt many of them. Regulatory compliance and other costs would make it prohibitively expensive for many financial advisers to offer many Americans of modest means a full range of financial products, particularly those where the adviser acts as a broker and gets a commission from selling them.
Such a change could not come at a more perilous time. Almost 40 million households have not saved anything for retirement, and 62% of Americans age 55 to 64 have less than one year’s savings. The rule’s regulatory costs would hit them the hardest, especially the 98% of the as many as 35 million of IRA accounts with less than $25,000, which depend upon brokerage relationships.
Members of one firm in my district, with dozens of offices that serve more than 30,000 customers, told me that they fear the Labor Department’s proposal will make it impossible to offer quality services to low- and middle-income customers. Tens of thousands of small investors I represent will have a harder time saving for their futures and those of their children.
The Labor Department disagrees, arguing that if brokers can recommend investments that earn them commissions, they might be giving “conflicted advice.” However, under current regulations, the Morgan Lewis law firm notes, that advice “must be based on a reasonable determination that the investment is suitable in light of the investor’s financial situation and investment objectives.” Many of my constituents tell me they save more because of the advice they get.
In 2013, the United Kingdom banned commissions for pensions and investment products. Within three months of enactment, the Europe Economics consultancy noted, 310,000 consumers lost access to their brokers, who could no longer afford to serve them.
The U.S. Labor Department has forsworn a total ban on commissions paid to advisers for retirement advice. Yet Dan Gallagher, a commissioner of the Securities and Exchange Commission, has said the department’s “fiduciary” standard could “effectively ban them by issuing rules full of so many ill-defined hoops and hurdles that any reasonable regulated entities would throw their hands up in defeat.”
So what can be done to ensure that investors get the protection they deserve? Mr. Gallagher has noted that SEC rules governing brokers “require clear disclosure to investors about payments and fees—including incentive fees—prohibit the use of manipulative, deceptive or fraudulent practices, and require significant diligence about investors and their needs.” Regulators need to ensure that current disclosures sufficiently inform investors about the services they receive, and the incentives involved.
Moreover, the Labor Department should work with the SEC, which has jurisdiction over financial advisers broadly and which could also impose a fiduciary rule. Without cooperation, financial advisers may face different—and therefore costly and confusing—regulatory requirements depending on whether their customers are saving for retirement or simply investing for the future.
The Retail Investor Protection Act, which I have co-sponsored with Missouri’s Ann Wagner, would force the Labor Department to delay issuing its fiduciary rule until the SEC issues its own first. It would also study other ways to protect investors from deceptive practices without imposing a uniform fiduciary standard on advisers and brokers.
No one should ever think he is receiving objective advice while listening to a sales pitch. But such advice can be helpful and accurate. This distinction is perfectly well understood in our society. Butchers do not double as paid nutritionists, but they can still preach about the nutritional benefits of red meat without confusing or bilking customers.
Mr. Hultgren, a Republican, is a congressman from Illinois and a member of the Financial Services Committee.