Saving for retirement might just get a bit easier for millions of Americans in the coming years, and for once, we don’t need to do a thing. This time, it’s our financial advisers who are being held to account.
On Wednesday, the Obama administration released the final version of new rules for professionals giving financial advice. It’s the culmination of a multiyear battle with the financial services industry, which argued that a higher standard of care would prove so costly it could be forced to dump lower- and middle-income savers en masse.
Under the new regs, financial advisers giving recommendations on retirement investments will have to offer advice that’s strictly in the best interests of their clients, something known as the fiduciary rule. Remarkably, as I’ve written many times, this is not the current standard. Instead, many financial advisers currently need to adhere to something called the suitability standard. That allows them to make suggestions for retirement investments that take into account how clients’ investments buttress their own bottom line. The advice just couldn’t be out-and-out malfeasant.
The Obama administration determined that this sort of advice was costing retirement savers up to $17 billion annually and decided to do something about it. The effort appeared to be languishing until early last year, when Sen. Elizabeth Warren took an interest in the subject. She ramped up the pressure by publicizing how, for instance, financial advisers in the insurance industry were rewarded with vacations at four-star Caribbean resorts in return for selling investors on particular annuities and other insurance offerings.
Under the current regulations, professionals giving retirement advice and working to the suitability standard don’t need to disclose these sorts of conflicts of interest to the savers they’re counseling. That’s going to change—and the financial services industry isn’t wrong when it says it will need to do more to ensure it’s meeting the enhanced standards. There will, for instance, be more paperwork. If the method of payment seems to suggest there could be a potential conflict of interest (like, say, a commission) between the adviser and the consumer, the adviser will need to sign a contract promising to put the consumer’s needs ahead of his or her own.
But doing more isn’t impossible. It seems highly unlikely that the changes put forth by the Department of Labor will force financial advisers to drop many of their customers, though it’s indeed quite possible they won’t earn as much money off of them. It’s almost certainly going to push advisers to recommend that retirement savers put their money in low-fee investments like index funds and make it harder for them to suggest complicated higher-cost options like variable annuities that just happen to be more lucrative for the advice-giver. That benefits the individual investor.
On the other hand, the final version of the new rules includes some changes from previous versions of the proposal—for example, it makes clear that commissions are still a permissible form of payment to advisers, something the industry was actively concerned about, and that retirement education in the workplace is not considered a covered activity. In addition, the fans of finance gurus on radio and TV can rest easy. The new rules make it clear that Dave Ramsey, Jim Cramer, Suze Orman, and other providers of financial infotainment aren’t in a one-to-one relationship with their fans, and can continue to offer up their opinions without fear of the feds knocking on their door.
The revised regulations won’t fully go into effect until 2018. While both Hillary Clinton and Bernie Sanders have said in the past that they support the Labor Department’s current initiative, the same is unlikely to be true of the eventual Republican nominee for president—last week, for example, House Speaker Paul Ryan tweeted out his opposition to the changes, calling them “Obamacare for financial planning.” It seems almost certain there will be some sort of legal challenge to the new regulations, as well.
Moreover, these changes only impact retirement savings. Money that investors hold in regular investment accounts fall under the purview of the Securities and Exchange Commission. As I wrote last week, they aren’t doing much on this front at all.
One other thing: The enhanced standard can’t fix our overarching retirement savings problem. We’re still not saving enough money for our post-work lives. The retirement crisis continues. The median working-age family continues to hold only $5,000 in its retirement accounts. Better advice won’t fix that problem. We need a better safety net, beginning with enhanced Social Security benefits, and a stronger economy, so people can save more, to accomplish that.