Last month’s Department of Labor hearings on conflicts of interest in the retirement advice marketplace didn’t really offer any new insights. Especially for those who would now fall under the proposed expanded definition of a fiduciary, many are still left unsure how it may affect their role and interaction with investors. While there certainly is an industry-wide affirmation that all participants must act in the best interest of investors, there remains little agreement on how to move forward.
Despite the Obama administration’s admirable desire to protect investors, the conflicting testimony from nearly 100 witnesses suggests that the proposals may still be too broad and too complex. Furthermore, an unexpected consequence could be that consumers find themselves with less access to financial guidance, limited investment choices, and higher costs as financial services firms contend with additional compliance.
In my opinion, perhaps the most important takeaway from the hearings is a near-universal agreement that Americans need to take a more active role managing their retirement savings.
The vast majority of retirement savers have relatively little understanding of financial markets and investing strategies. Yet, retirement planning requires a high level of engagement with complex financial information. And that’s why the advisor is so valuable in the equation.
Equally important is training. We certainly heard that companies want to continue to offer their employees important information and education about retirement planning and investment choices without crossing the “fiduciary” line.
Against the “retirement crisis” backdrop, it’s important to revisit what’s driving the White House push for new regulations on an industry many argue is already subject to substantial and complex oversight.
The Obama administration is concerned that conflicts of interest affect investment advisors’ behavior and that advisors often act opportunistically, to the detriment of clients, because they receive commissions from product providers.
White House figures suggest consumers receiving conflicted advice over a 30-year period could lose one to three years-worth of withdrawals during retirement, and potential investor losses could be as high as $8 to $17 billion per year for all Americans.
In the face of such shocking numbers, it’s easy to lose sight of the fact that most financial advisors do act in the best interests of their clients. In fact, not only are there regulations in place to help protect investors from conflicts, but most financial advisors, like their clients, are in it for the long term and want to build lasting relationships. Offering investment recommendations that deliver subpar performance is unlikely to help them meet this goal.
So where do we stand now?
Several hearing witnesses reiterated that the fiduciary proposal was simply unworkable. Others praised it for addressing hidden costs within the retirement advice universe. Many asked why a proposed Universal Best Interest Standard for broker-dealers and other financial intermediaries was not a workable solution. Others, however, struggled to provide concrete suggestions for making the fiduciary standard clearer.
As the Department of Labor’s post-hearing comment period continues, industry watchers are keeping close tabs on Secretary Thomas Perez, looking for clues on the status of the proposals. While it is important to recognize the proposed regulations were crafted with investor protection in mind and careful consideration must be applied to each recommendation, the looming 2016 presidential election weighs heavily on the entire matter.
Can the Obama administration follow through with new regulations? Will a possible Republican in the Oval Office quash the issue entirely? Stay tuned.
Terry Dunne is Senior Vice President and Managing Director of Rollover Solutions Group at Millennium Trust Company. Mr. Dunne has over 35 years of extensive sales and marketing experience in the financial services industry.