Investment Advisers Don't Act in the Best Interest of Their Clients: They Siphon from Investors Between $8 Billion and $17 Billion a Year in Fees and Lower Returns
How Wall Street is fighting to rip off your retirement money
February 6, 2015The Fiscal Times - There’s an imminent fight looming over whether financial advisers should be prohibited from cheating their clients when working with over $11 trillion in retirement savings.
The new proposal would be the first update to the rule in 40 years and would finally cover employment-based retirement accounts like 401(k)s, which didn’t exist in 1975.
The upper-middle class is disproportionately represented in these plans. While 69 percent of households making over $200,000 a year have an Individual Retirement Account (IRA), only 21 percent of households below the median income of $50,000 a year have one, according to a report from the Investment Company Institute. This matches government data on retirement accounts offered at work.
The lack of a fiduciary rule for these accounts subjects investors to being ripped off. Under current law, IRA and 401(k) advisers can recommend products in which they have a financial stake, making the whole advisory process more like a racketeering effort.
Financial advisers can get back-door payments from the providers of the products they recommend. So they steer savers into high-cost actively managed funds (which perform worse than low-cost passive index funds) and complex, expensive annuities, or recommend rollovers from cheap 401(k) plans into high-fee IRAs. They also create “churn” through constant buying and selling of stocks and funds, earning a new fee on each sale.
“The situation we have now is a mess,” said Marcus Stanley of the coalition Americans for Financial Reform.
Furman and Stevenson point out that the Labor Department rules are actually less stringent than companion rules in other countries, which ban all kickback payments from investment providers and advisory firms and prohibit other conflicts of interest. In facts, experts like the Center for Retirement Research at Boston College believe the government’s new rule doesn’t go nearly far enough. But this hasn’t stopped Wall Street firms from waging a years-long battle to preserve their nice profit center.
The indomitable Phyllis Borzi, an assistant secretary at the Labor Department, tried to re-submit the rule in 2014, but industry pressure and White House concerns forced a second delay. The date was re-scheduled for this January, and the leaked memo suggests that the White House is finally on board. But last month, trade groups made personal appeals to top presidential advisors Valerie Jarrett and Jeffrey Zients. The rule has not yet been sent to the White House’s Office of Management and Budget for administrative review. A call to Labor Department spokesman Mike Trupa was not returned.
You can expect Wall Street to employ Congress in this fight as well. In 2013 the House passed a bipartisan bill that would have delayed Labor Department action until the Securities and Exchange Commission, which has overlapping jurisdiction and is seen as more Wall Street-friendly on this issue, wrote its rule first.
That bill never made it through the Senate. But with Republican control of both chambers, lobbyists will surely take another run. Orrin Hatch, new chair of the Senate Finance Committee, wants to combine a bill expanding “starter” 401(k) plans for small employers with a provision shifting jurisdiction on the fiduciary rule from Labor to the Treasury Department. Treasury would need to start over, delaying the rule for years and putting it in a venue more susceptible to Wall Street pressure. Treasury would also have to consult with the SEC on the rule under Hatch’s legislation.
Our retirement system is bad enough, even if clean. Plans based on the rise and fall of the stock market, instead of defined-benefit pensions, shift risk to the individual and weaken retirement security. But the idea that people have to tolerate conflicted advice in order to save for their golden years is ludicrous.
President Obama wants to expand employer plans to lower-income and part-time workers and allow everyone to save in a stock account, but we don’t need a Wall Street solution to the retirement crisis. In a perfect world, the government would significantly expand Social Security, using the tax advantages for IRAs and 401(k) plans to fund a bigger universal payout.
At the absolute minimum, we can do something to stop financial managers from pulling money out of the $11 trillion retirement account kitty. The upper-middle class should play a vital role in this fight, since it’s largely their money being stolen. But this matters to anyone who wants to experience a dignified retirement someday, and anyone who cares whether the financial sector will be able to hold onto a policy of legalized theft.
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