Tell Congress to Close the Loophole

Most people have to rely on money saved over years of work to fund their retirement, and often this money is accumulated through a 401(k) plan at work or some other type of investment.  Long gone are the days when a guaranteed pension gave workers financial security in retirement; today, only one in five workers has access to such a plan.  This means workers have to take on the risk of investing, which is a scary proposition.  Investment losses can be devastating late in life, as there aren’t decades of work ahead to replace it.

 

Seeking a professional to provide advice—such as a broker or financial adviser—is common for people wanting to invest.  Financial instruments are complex, and it is very difficult to assess risk, fees, and other factors that play heavily into an investment decision.  Yet right now most advisers who provide investment advice do not have to act in their client’s best interest.  The recommendation must simply be “suitable.”   It may not sound like a huge difference, but this loophole allows advisers to present advice based on what’s best for their pocketbook instead of yours.

Part of the problem is the myriad of titles given to those who provide investment advice.  Financial planners, financial advisers, investment advisers all sound like they should be equally trained and certified.  In reality, they can have widely varied backgrounds in finance.  There are certification requirements based on the types of products an adviser sells, but the title itself does not necessarily carry any guarantee of expertise.  A financial planner need not have any training at all.  Registered investment advisers are held to a fiduciary standard—i.e., that the recommendations they provide must be in the best interest of the client.  But this is the exception to the rule.   

It’s more than making a level playing field.  It’s about the expectation of trust.  When you pay someone to perform a service for you, there is an understanding of customer satisfaction with a job well done.  But the way most financial advisers are paid creates an inherent conflict of interest.  Riskier investment can garner higher fees for the advisor.  Given the choice between options that pay a low or high commission, it’s easy to see where the conflict arises.  Last year alone, hidden fees, unfair risk and bad investment advice robbed Americans of as much as $17 billion in lost investment income.

Recently, the U.S. Department of Labor published proposed rules that will require advisers to provide investors with recommendations that are in the best interest of their clients.  The new rules would update the Employee Retirement Income Security Act (commonly known as ERISA) which was enacted in 1974 when retirees could rely on pensions and did not have to worry as much about managing retirement savings. Investors potentially face increased risk when they roll over the savings they have accumulated in workplace retirement accounts, which are overseen by their employers, into individual retirement accounts. According to a recent New York Times article, in 2012 alone, rollovers to I.R.A.s exceeded $300 billion, and that is expected to rise steadily in the years ahead.

We strongly support rules that protect retirement savings against recommendations that put the financial adviser’s bottom line in conflict with those of his or her client.  It just makes sense.  There shouldn’t be any question that the investment advice you receive is in your best interest.  That doesn’t mean there isn’t any risk—it just means that you’re getting what you’ve paid for from your adviser.

What will you lose if a portion of your savings was drained? Tell Congress to protect your hard-earned retirement savings!