Wall Street certainly has made a lot of money over the years running the country’s 401(k) plans. Inevitably, time passes. So now they want to make sure they can make as much or more running your personal retirement IRA.
Trillions of dollars are at stake as people leave work and roll over money into IRA accounts. Accordingly, legislation is moving through Congress that would let brokers and insurance agents continue to offer you advice that is not in your interest, so long as it’s “suitable” to you.
There’s an ocean of difference between “suitable” and “in your interest.” The broker you consult might easily be picking up a fat commission check (or multiple checks) for putting you in a fund or product.
How would you know? You wouldn’t. This is the same obfuscation that allows workplace plans to charge investment management fees of 2.47% or more for plain-Jane stock and bond funds that index fund investors buy for one-tenth the cost or less.
It’s the difference between getting a prescription from your family doctor vs. buying a supplement over the Internet. Your doctor has sworn to “do no harm” and has nothing to gain from steering you toward untested remedies. You trust him or her for a reason — the personal relationship, yes, but also the assurance of regulatory oversight.
The supplement pushers want your credit card number and that’s all. If the pill they sell happens to help you in some way, that’s fine. But it’s no skin off their nose if you keel over tomorrow.
This retirement advice legislation has come up now because the Department of Labor is working to push brokers and agents toward what’s called the “fiduciary standard.” In simple terms, brokers could continue to collect commissions but they would be held to a higher level of responsibility for the outcomes.
“Our intent is to protect consumers from conflicted investment advice,” Phyllis Borzi, assistant secretary of the department’s Employee Benefits Security Administration, told The New York Times.
The investment industry doesn’t like this idea at all. They’d prefer that Borzi leave retirement IRA plans alone. They contend that drying up the commissions-driven business might cut smaller investors off from advice they need.
Which raises a question: Is conflict-ridden advice worth anything at all?
Wall Street is working to dodge a bullet here, hoping to get a friendly set of rules written by some agency other than the Department of Labor. One way they might do so is by providing disclosure of their conflicts, rather than being forced to avoid them in the first place.
If you agree to those conflicts, and you might agree if they were buried in fine print, then your broker can continue to do business as usual.
Retirement IRA rent-seeking
It’s not surprising. Rent-seeking is as old as the hills. Rather than create wealth, which is hard work, most people prefer to exploit a lack of understanding or lack of political will in order to earn a tidy, regular profit under the radar.
One way to do that is to arrange a monopoly. But investment advice is no monopoly, you say. There are brokers on every street corner!
Yes, all selling the same bunch of funds with the same compensation schemes. There’s no incentive among the funds to compete, since they have to pad the pockets of the salesforce out there working on their behalf. The funds need a way to attract the most prolific sellers, the brokers.
That’s a recipe for rising costs. Every person who touches the deal gets their slice of your money for marketing, or selling, or just picking up a phone, yet all they really do is trade the same group of clients back and forth, depending on who happened to do slightly better in the preceding 12 months.
It doesn’t matter what the markets do — bull or bear, boom or bust — so long as Wall Street doesn’t have to ’fess up to how they get paid, by whom, and how much.
Everybody wins, except for the customer.
