President Barack Obama in February rolled out a plan to impose stricter rules on brokers and others who help people invest their retirement savings — necessitated, he says, by widespread conflicts of interest that may be costing savers up to $17 billion per year in lost earnings. The chief targets, Mr. Obama said, are financial advisers who base their advice on what’s best for their own compensation rather than on what would maximize returns for their customers.
Such “conflicted advice” is allegedly prevalent in the half-trillion-dollar-a-year business of rolling 401(k) money into individual retirement accounts when people change jobs or retire, the White House said. The proposed regulations, to be drafted by the Labor Department, would address the issue by imposing on all advisers a fiduciary duty to act in the “best interest” of a client. In contrast, the current system allows some brokers to act based on what’s “suitable” for a client, given such individual client characteristics as age and risk-aversion.
The administration correctly notes that assuring optimal investment is doubly important now that most employers have shifted from defined-benefit pension plans to portable accounts managed by individuals. Mr. Obama floated a similar proposal in 2010, only to be defeated by industry and congressional resistance. Then, as now, investment companies objected that consumers already are protected by compensation disclosure rules and that imposing a fiduciary duty would raise brokers’ costs of doing business — which would be passed along to the detriment of small savers.
As for the administration’s estimate of $17 billion in potential savings, the industry asserts that is based on academic studies that do not accurately measure the difference between advice delivered by fiduciaries and non-fiduciaries — because the dollar value of investment advice is inherently difficult to quantify. The Investment Company Institute also notes that the bulk of IRA money is held in lower-cost mutual funds, contrary to critics’ predictions.
What we have here is a clear and valid principle — investors should receive advice that is in their best interest — that is going to be devilishly difficult to reduce to enforceable regulatory language. And that would be true even if industry were not preparing a lobbying drive.
Mr. Obama dismissed concerns that new regulations might drive up costs, saying, “You shouldn’t be in business” if that business is “bilking hardworking Americans.” That merely raises the question of what, exactly, constitutes “bilking.”
An analogy is to the Volcker Rule, the ban on risky proprietary trading by banks that was included in the Dodd-Frank financial reform bill at the urging of former Federal Reserve chair Paul Volcker. Easily defined in theory, proprietary trading proved far harder to identify, and ban, in practice. The result was months of bureaucratic trench warfare and hundreds of pages of regulatory boilerplate in which exemptions swallowed much of the prohibition.
The precise text of Mr. Obama’s proposed fiduciary standard for investment professionals won’t emerge from an internal White House vetting process for up to three months. Only then will it start to become clear whether his lofty promises can translate into workable policy.