Tougher Rules for Retirement Brokers
President Obama wants to stop unscrupulous brokers from skimming money from your retirement account, said Marcy Gordon in the Associated Press. The White House is backing new rules that would require brokers that give advice to retirement savers to act in their investors’ best interests, just as financial advisers are required to do. Right now, brokers are only required to recommend investments that are deemed “suitable” for their clients, based on an investor’s age, finances, and risk tolerance. That latitude leaves brokers free to “nudge” clients toward underperforming investments that pay them a higher commission.
Many investors may not even be aware that their brokers are profiting by “steering them into costly products,” said Jonnelle Marte in The Washington Post. For instance, brokers are currently free to recommend that investors roll 401(k) funds into IRAs without first warning them “that the fees they incur in the new plan may be higher.” Brokers can also collect payments each time an investor buys a certain fund or security, and so some recommend that clients buy and sell those products “repeatedly and unnecessarily.” Some brokers also deliberately hawk expensive investments, like actively managed funds, simply to justify their fees. These unsavory practices add up: Experts estimate such practices cost retirement savers as much as $17 billion a year.
You’d think that protecting taxpayers’ retirement dollars from costly conflicts of interest would be “anything but controversial,” said Tara Siegel Bernard in The New York Times. But the Labor Department, which oversees retirement plans, has received enormous pushback from “powerful and well-funded opponents in the financial services industry” since 2010, when it first proposed holding brokers to stricter standards. Critics of the current proposal say the White House is being misleading about how brokers make their money, and that the “costs of compliance” with the new rules will limit low- and middle-income Americans’ ability to get good financial advice.
But “in its heart, the industry knows this” is the right move to make, said Bob Pisani in CNBC.com. Many brokers are already moving “away from commissions and toward flat fees,” partly because of ethical questions, but also partly because they understand that the rise of robo-advisers will make targeted investment advice cheaper over time. At the end of the day, investing rules need to catch up with reality, said Danielle Kurtzleben in Vox.com. Broker standards were last updated in 1975, “before 401(k)s even existed.” Now that most Americans are responsible for their own retirement security, they deserve the advice of experts whose expertise isn’t “distorted by bias.”
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