White House Prepares New Rules for Financial Advisors

February 24, 2015

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Source: Value Walk

The White House is preparing new rules designed to strengthen restrictions on financial advisors providing guidance to clients regarding retirement savings.

Based on the draft memo obtained by The Hill, the White House noted that the current system of retirement savings requires Americans to navigate through a complex selection of investment products and services. Given the complexity of making decisions regarding retirement savings, workers need investment advice.

According to the White House, the legal framework governing the treatment advice for retirement plan participants hasn’t been substantially updated since it was issued in 1975.

The memo noted that consumer protections are inadequate for investment advice in the retail and small plan markets, and the current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars annually.

Financial advisors are affected by conflict of interests

Financial advisors encourage investors to transfer from low-cost employer plans to higher fee IRA accounts and higher cost products to gain incentives. The current regulation also allows fund sponsors and advisory service firms to create incentives for their financial advisors to recommend repeated buying and selling of retirement assets, according to the memo.

In other words, financial advisors have conflict of interests and are providing guidance to clients that are not in their best interests. The memo emphasized that an academic research found that the behaviors of financial advisors were affected due to conflict of interests. Oftentimes they become opportunistic at the expense of their clients because of the incentives of payment they receive from product providers.

According to the memo, studies showed that IRA investors using financial advisors pay excessive fees. Those who receive conflicted advice who are expecting to retire in 30 years losses 5% to 10% of their retirement savings. One study found that financial advisors “systematically direct clients to mutual funds with unusually high conflicted payments,” with worse performance.

For years, concerns were raised about the conflict of interests among financial advisors and investment dealers when helping Americans regarding their retirement savings—IRA and 401(k). They are making commissions and sales by giving financial advice that are not in the best interest of their clients. The industry rejected the allegations and argued that low-income and wealth Americans get the same financial advice.

“Cherry-picked with facts”

An insider in the financial services industry told The Hill, “This memo is cherry picked with facts. This is another sign that the president isn’t working toward bipartisanship and wants to placate Sen. Elizabeth Warren and the Warren-wing of the Democratic Party.”

On the other hand, a White House official said there were “no updates regarding potential Department of Labor fiduciary rules or policies.” He clarified that if the government moves forward with a proposed rule, they will follow the standard practice and process for a notice of proposed rule-making including a publication in the Federal Register followed by a comment period.

Department of Labor Assistant Secretary Phyllis Borzi has been pushing to expand the rules on “fiduciary duty” for financial advisors who are helping Americans make decisions regarding their retirement savings. Some people suggested that the memo is a sign that more senior officials in the White House support Borzi’s objective.

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