Protect retirement assets from self-serving advisers

Last year, the Labor Department proposed a regulation to close loopholes in the Employee Retirement Income Security Act of 1974 that give financial advisers the ability to avoid accountability when it comes to retirement plans such as IRAs.

Under significant pressure, the Labor Department withdrew the proposed regulation and promises to re-propose it by this summer. This effort is being met with heated opposition from the Financial Services Institute Inc., which argues that these changes would leave millions of individual retirement account investors without access to advice from an adviser.

The inference is simple. If advisers were required to put the interests of these IRA clients first and work on a fee-based model, versus the more self-serving commission-based model, the FSI and other industry organizations think that advisers wouldn’t make enough money from these average American investment accounts to make it worth the effort.

Added to this is the expected increase in compliance costs.

Retirement assets should never function as a feeding pond for self-serving professionals. We need to apply the same set of regulations to fee-based advisers and commissioned brokers, and hold them equally accountable for the protection of American workers.

The best way is to make certain that these professionals are held to the highest standard of care, where the interest of the customer always comes first (duty of loyalty); the advice is given with the care, skill, prudence and diligence that befit an expert (duty of due care); and the process is carried out honestly (duty of good faith).

“BUYERS, BEWARE’

This whole notion of embracing the status quo so that affordable advice can remain available to average (synonymous with less affluent) Americans has some real problems. By inference, this kind of affordable advice is given under a nonfiduciary relationship based on the Financial Industry Regulatory Authority Inc. suitability standard.

This is a commercial-sales standard of “buyers, beware” and relies heavily on disclosures. To put it bluntly, the financial professional can be compensated only if he or she sells something at the end of the advice process.

Assuming that most people need to make a living and are not simply giving their professional expertise for the public good, the relationship is conflicted. The FSI and many other industry lobbying groups are saying that if the Labor Department succeeds in applying the fiduciary standard, the cost of providing advice will skyrocket and make it unaffordable for most investors.

What the groups failed to say is that average Americans already pay a hefty sum through front-load, back-load, 12(b)-1, bonus, incentives, trips, soft dollars and other direct and indirect compensation for selling products masked as giving advice.

The questions remain: Is conflicted advice really advice? Are average Americans receiving unconflicted advice for their IRA assets?

Advice should be considered only under the best-interests standard and doesn’t equate to delivering product information along the way of making a product sale. This isn’t advice but selling disguised as advice.

Perhaps average Americans are really not receiving advice, and only financial products.

Assume that the average commission for selling a front-load mutual fund is 4% and the average IRA balance is $25,000; the gross commission paid is $1,000.

If a fee-only planner charges $125 per hour, this is equivalent to eight hours of billable time (probably sufficient time for a simple financial plan).

TWO AMERICAS

If the same mutual fund is implemented on a load-waived basis, the net cost to the client is the same. However, the fee-based financial professional is offering the services as a fiduciary, and the average American isn’t left to wonder if the adviser is serving with a divided loyalty or offering something he or she can’t deliver.

This argument by the FSI and other lobbying and industry organizations against the Labor Department rule as pricing “Main Street Americans out of financial advice” is in fact perpetuating the two- Americas discussion.

The application and adherence to the fiduciary standard will continue to be reserved for the affluent, while average Americans will continue to be served by conflicted product sales professionals who don’t have their clients’ best interests in mind.

Are middle-class investors less deserving of fiduciary advice when it comes to their IRA assets?

A case can be made that the advice given in a conflicted and disloyal manner can do more harm than good.

Perhaps it is time to hold the financial services industry’s feet to the fire so that we can better protect our collective golden egg.

Philip Chao is the principal and founder of Chao & Co. Ltd., which provides retirement, fiduciary-plan consulting, health and welfare consulting, and wealth management services.