September 29, 2015
Is Your Financial Adviser Making Money Off Your Bad Investments?
New York Times op-ed, by Lily Batchelder and Jared Bernstein
Earlier this year the Obama administration proposed a “conflict of interest” rule, designed to ensure that when it comes to saving for retirement, financial advisers always put their clients’ interests above their own — instead of, say, nudging their clients into investment products that pay the advisers more for their recommendation, but offer less return for the investors. The administration’s proposal, to be implemented through the Department of Labor, says that advisers who receive side payments like this have to disclose them to clients, and also commit to an enforceable “fiduciary” standard — meaning they have to put their customers’ best interest before their own profits. Not surprisingly, some financial services companies don’t like this idea, and have been spending millions of dollars lobbying to block the rule. …True, we shouldn’t assume that all advisers who make more from recommending one product over another are providing bad advice. But independent research has carefully compared the returns of retirement savers who receive conflicted advice versus other savers, and found that conflicted advice, on average, shaves about one percentage point per year off a saver’s returns. This may not seem like a lot, but it adds up: Over 35 years, a one percentage point lower annual return can reduce your nest egg by more than 25 percent. The proposed rule would go a long way toward reversing the estimated $17 billion that families are losing each year as a result of conflicts of interest by reducing the prevalence of bad advice, allowing the many advisers who are already ignoring or refusing conflicted payments to compete on a level playing field and expand their business. Right now, these advisers providing quality guidance risk losing business to conflicted advisers who claim their services are cheaper or “no fee” when, in fact, they get their compensation from side payments from the companies whose investment products they recommend. Conflicted advisers are ultimately more expensive, both because they are getting higher fees that the consumer isn’t seeing and because they are recommending products that have lower returns — even before fees — than equivalent investments. Most consumers aren’t on the lookout for unscrupulous advisers. An astounding 75 percent believe, incorrectly, that all financial advisers already have to act in their best interest.
Read the full New York Times op-ed by Lily Batchelder and Jared Bernstein here.