Are Biased Brokers Handling Your Retirement Fund?: The Fight to Heighten Broker Standards for Retirement Savings Investment
A recent Blomberg News article by reporter Robert Schmidt addressed assistant secretary at the U.S. Labor Department, Phyllis Borzi’s fight to tighten the standards for Brokers investing retirement accounts. Below are excerpts from that article.For a full view of the article go to http://www.bloomberg.com/news/2014-06-18/cobra-s-mother-takes-on-wall-street-in-fight-over-401-k-s.html
How Americans save for their latter years has changed vastly since Labor first set rules for retirement funds in the 1970s. Many workers had employer-controlled pensions and the 401(k) didn’t exist. Now, pensions are rare and tens of millions of people rely on their 401(k) plans and IRAs, which together hold almost $11 trillion.
According to Phyllis Borzi, assistant secretary at the U.S. Labor Department, those resources are increasingly needed. Some 10,000 people will turn 65 every day from now until Dec. 31, 2030,
Borzi is fighting to protect those precious dollars. She has long argued that people’s retirement savings can be eroded by high fees or imprudent investments recommended by advisers with hidden incentives. She is pushing for brokers to be held to a legal standard that they must act in a client’s best interest, an obligation known as a fiduciary duty.
Brokers are held to a "suitability" standard, meaning they must reasonably believe their recommendation is right for a client. Investment advisers operate under the fiduciary standard, which imposes a much tougher overall responsibility for the customer’s welfare.
One rationale for changing the rules is that it would be easier for investors to expect the same treatment no matter who they deal with. The question of course if whether this is a whole lot of smoke without a fire; is there really a need for protection?
The Government Accountability Office last year decided to test how frequently salespeople for financial firms provide misleading advice. It had an investigator pose as a customer asking how to handle a 401(k) account after leaving his job.
After checking with 30 firms that administer the accounts, the GAO determined that investors were often given incomplete or incorrect guidance that steered them to convert their 401(k) into an IRA run by the same company, a move that could lead to higher fees and less protection. The report, released in April 2013, urged Labor to complete its fiduciary rule and require that brokers and other salespeople disclose conflicts of interest "in a clear, consistent and prominent manner."
Even if there is reason for concern, Brokers argue the cure could be worse than the problem. They say, if Brokers became fiduciaries it would create more paperwork and a higher risk of lawsuits from displeased customers, raising costs so much they’d be forced to switch clients into advisory accounts.
That model, the industry argues, isn’t economical with smaller accounts -- those with balances under $50,000. Those investors would likely be forced to handle savings on their own, sorting through options online without professional help.
Still, despite heavy opposition to the proposed change, Phyllis Borzi fights on. In a March speech to the Financial Services Roundtable, an industry trade association that opposes her plan, Borzi argued, the fiduciary standard is a "critically important" consumer protection.
"People who hold themselves out as experts, who cultivate a relationship of trust with clients, need to put their money where their mouths are," she said. "They need to actually put the clients’ interest first."
