AFTER NEARLY seven years of political and bureaucratic warfare, the Obama administration is about to unveil stricter rules governing brokers and others who help people invest their retirement savings. Specifically, the administration wants to impose a legally enforceable duty to act in the “best interest” of clients, similar to the fiduciary duty lawyers and other professionals already owe.
The administration says the “fiduciary rule” is necessary for two reasons: First, in the modern era, Americans’ retirement funds reside heavily in individual tax-advantaged accounts such as 401(k)s and IRAs, the former accounting for $4.2 trillion and the latter $7.4 trillion in 2013. Yet federal regulations date from 1975, when corporate pensions predominated. Second, many financial advisers to IRA investors get paid commissions based on sales of certain products that may not be best for their clients, yet those compensation schemes are not always transparent.
It all seems commonsensical; a White House study suggests “conflicted advice,” allegedly particularly prevalent in the half-trillion-dollar-a-year 401(k) rollover business, costs consumers $17 billion in higher fees per year. The problem, according to the investment industry, is that the administration is using a hammer to swat a fly. Opponents do not deny that commission-based compensation schemes can create apparent conflicts of interest, but advisers are still required to act based on what’s “suitable” for a client. The proposed regulation, they argue, will render unprofitable commission-based business models that are the only way many small savers get investment advice now, and the costs of that would outweigh the costs, if any, of the status quo.
At its core, the fiduciary rule fight is, like many issues in Washington, a problem of where to draw the line. The fiduciary rule would inevitably abolish some number of business relationships certain people might accept; instead of possibly conflicted, but still “suitable,” advice, they would get none, or perhaps “robo-advice” online. On the plus side, however, other people would be protected from exploitation.
Both sides toss around cost-benefit estimates with faux precision; in truth it’s devilishly difficult to put a dollar value on what brokers and other investment advisers actually do — much less define it concisely, as the many prolix pages of the Federal Register devoted to the “fiduciary rule” prove. The investment industry’s strongest point is that a proposed exemption the administration offered to placate opponents is so vague and unworkable that few, if any, companies would take advantage of it.
That doesn’t mean, however, that the whole rule (or at least the drafts that have appeared in public) is fatally flawed. We revert to common sense: If you’re in business to advise small investors, it should be as clear as possible that you work for them and not a third party behind the scenes. Yes, the fiduciary rule might shrink the business, but what remains could well enjoy greater legitimacy, in both reality and perception. In this time of raging populism, the financial industry needs all the trustworthiness it can get.