Caveat emptor: Watch where research on the fiduciary rule comes from
There’s nothing warm and fuzzy about retirement. If we’re lucky, it’s the thing we do before we die. It’s expensive. We might have to do it alone. On top of our own problems, it’s unpleasant to think about how our parents might run out of money in their retirement and then depend on us for financial support and care-giving. Your parents might need advice, and so might you.
You want that advice to be in your best interest but, too often, it isn’t. Many advisors are paid to recommend investments that generate income for them even when better options are available for you. As a result, you might lose a lot of money or not see your investments grow as quickly. Right now, the Obama administration is proposing to update regulations so that such practices will cease. But special interest groups that benefit from the status quo are spending a lot of money to stop the rule from taking effect.
Specifically, the Department of Labor has proposed a regulation to curb “conflicts of interest.” This rule would require an advisor helping you with your retirement investments to be held to a fiduciary, or “best interest,” standard. If this rule takes effect, it would amend existing regulations that currently permit experts advising on retirement investments to be paid more by recommending certain investments over others, even when such advice is not in the best interest of their clients. Today, there’s little to stop ‘advisors’ from getting paid extra to put you or your parents into inferior investments, a practice one finance professor called “superslimy.”
To no surprise, those benefiting from current practices have paid for research to try to discredit the proposed rule. Such research claims that people don’t lose as much money from biased advice as careful, independent research has shown. Research not funded by special interest groups concludes that when they are paid to recommend certain financial products over others, advisors tilt their recommendations so that they receive higher pay. In other words, advisors respond to financial incentives just like the rest of us. Such biased advice hurts savers by lowering returns and by increasing fees.
Independent research must generally undergo an anonymous review process before publication. Studies funded by special interests need not face such scrutiny. When it is to their advantage, they may use analytic techniques that would not be accepted in academic research, draw inaccurate inferences, use inappropriate data, or selectively report the results.
In addition to denying the harm of biased advice, critics of the regulation pivot and allege that the Department of Labor has not crafted the right solution to a problem whose existence they initially denied. Although there are many serious ways to assess the merits of the proposal, some special interest groups assert that the proposed solution will curtail advice to savers, leaving them worse off. But, simply put, unbiased and unconflicted advice is now available at a low cost from people and from sophisticated computer software. It is even available for low-balance savers. It would be a major step forward if advisors working on behalf of their clients did not have to compete with people who purport to act for their clients but who, in fact, are being paid by third parties. The public discussion should thus focus on how best to curb practices that harm people and how best to assure that retirement savers receive advice that is in their best interest.