U.S. President Barack Obama is directing the Department of Labor (DOL) to devise a rule requiring financial advisors to adhere to a fiduciary duty when providing investors with advice on their retirement savings.
The White House announced Monday that it is calling for a new rule mandating a fiduciary duty for retirement advice. At the same time, it released a report from the Council of Economic Advisors (CEA), which indicates that, on average, U.S. investors see their returns reduced by 1% annually as a result of industry conflicts of interest. The report indicates that these losses stem from advisors steering clients into funds with higher fees, and due to improper rollovers from lower-cost retirement plans into pricier vehicles.
The report finds that an estimated US$1.7 trillion of retirement account assets are invested in products that provide payments that generate conflicts of interest. As a result, it estimates the aggregate annual cost of conflicted advice is about US$17 billion each year.
“Because of outdated rules protecting retirement savings, we’re seeing similar types of bad incentives and bad advice lead to billions of dollars of losses for American families saving for retirement every year,” the White House reports. “That’s why today, the President directed the Department of Labor to move forward with a proposed rulemaking to protect families from bad retirement advice by requiring retirement advisers to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits.”
The DOL will issue a notice of proposed rulemaking in the next couple of months seeking public comment on a proposed rule. “The Department’s proposal will seek to crack down on irresponsible behavior in today’s market for financial advice by better aligning the rules between employer-based retirement savings plans and [retirement accounts],” it says.
The securities industry immediately reacted negatively to the announcement. “While we cannot comment on a proposal we have not yet seen, we have ongoing concerns that the DOL regulation could adversely affect retirement savers, particularly middle class workers. The new regulation could limit investor choice, cause inconsistencies as different regulators would apply different standards to the same retirement accounts, prohibit access to investor guidance, and raise the costs of saving for retirement,” said Kenneth Bentsen, Jr., president and CEO of the U.S. Securities Industry and Financial Markets Association (SIFMA).
Here in Canada, securities regulators are also considering whether a fiduciary duty is required where retail investment advice is concerned.