International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Wednesday, February 25, 2015

Will a New Fiduciary Standard Fix the Advisor-Client Conflict of Interests for Retirement Accounts?

White House Report THE EFFECTS OF CONFLICTED INVESTMENT ADVICE ON RETIREMENT SAVINGS

See President's Obama Speech about enacting a fiduciary standard for retirement advisors.

Defined contribution plans and IRAs are intricately linked, as the overwhelming majority of money flowing into IRAs comes from rollovers from an employer-based retirement plan, not direct IRA contributions.

Collectively, more than 40 million American families have savings of more than $7 trillion in IRAs. More than 75 million families have an employer-based retirement plan, own an IRA, or both. Rollovers to IRAs exceeded $300 billion in 2012 and are expected to increase steadily in the coming years.

The decision whether to roll over one’s assets into an IRA can be confusing and the set of financial products that can be held in an IRA is vast, including savings accounts, money market accounts, mutual funds, exchange-traded funds, individual stocks and bonds, and annuities. Selecting and managing IRA investments can be a challenging and time-consuming task, frequently one of the most complex financial decisions in a person’s life, and many Americans turn to professional advisers for assistance.

However, financial advisers are often compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the adviser’s bottom line.

A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.

Reuters reports - Speaking at an event hosted by the AARP Inc, formerly known as the American Association of Retired Persons, Obama said, "It's a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first. You can't have a conflict of interest."

The proposal is opposed by many Republicans, financial firms and some of Obama's fellow Democrats who fear the plan will limit retirement products available to investors and curb brokers' compensation.

Ken Bentsen, president of the Securities Industry and Financial Markets Association, said the SEC is the appropriate entity to consider any new rules, and called the White House's research supporting reforms inadequate.

Think advisorThink Advisor reports thatSecurities and Exchange Commission Commissioner Daniel Gallagher argued Friday at the SEC Speaks conference in Washington, however, that DOL’s rule to amend the definition of fiduciary on retirement accounts is a “runaway train,” and that the recent White House memo supporting release of the redraft is “thinly veiled propaganda designed to generate support for a widely unpopular rulemaking.”

SEC Chairwoman Mary Jo White said Friday at the same event that she would speak about her position regarding an SEC rule to put brokers under a fiduciary mandate “in the short term,” stating that it remains a priority of hers “to get the Commission in a position to make that decision” on such a rule.

 

https://lawprofessors.typepad.com/intfinlaw/2015/02/will-a-new-fiduciary-standard-fix-the-advisor-client-conflict-of-interests-for-retirement-accounts.html

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