It’s pretty hard to come up with a good argument against the White House’s Monday proposal to require brokers to act in their client’s best interest when it comes to retirement accounts. But the Securities Industry and Financial Markets Association (SIFMA) is a lobbying group thats gets paid to make such arguments, so it took a stab at it.
The new regulation, called the fiduciary rule, would apply to 401(K)s and other kinds of retirement savings, and it would require brokers to act in the best interest of their clients, rather than the best interest of their top line. Currently, brokers who work on commission can get paid extra to push people into high-fee funds, or encourage them to trade more often than they should. The White House said Monday that the Labor Department will release more details on the proposed plan in the coming months.
But SIFMA doesn't think this is such a great idea. In a press release, CEO Ken Bentsen said the rule would “prohibit access to investor guidance, and raise the costs of saving for retirement.”
Less information and higher costs -- both would certainly be bad for Americans and their retirement accounts. Fortunately, the rule would cause neither.
The only information the new rule would deny brokerage customers is stuff they probably shouldn’t have heard anyway: in other words, stuff their broker probably said just to generate more commissions. Brokers may call it “education,” but they're are conflicted. Because they rely on commissions, brokers can have a financial incentive at times to work against their clients' best interests.
Brokers can, simply put, get paid to tell clients to do things that are bad for them. The White House estimates Americans lose $17 billion a year because of conflicted broker advice, and it thinks the fiduciary rule is the best way to combat this problem. By eliminating the conflict of interest and forcing brokers to work in the best interest of Americans saving for retirement, the proposal aims to stop some of that money from being wasted.
So how can the financial industry claim with a straight face that getting rid of these bad incentives will make retirement more expensive? By cleverly ignoring how commission-based accounts actually work. Here’s how Bentsen spun the argument on Bloomberg TV: He argued that commission accounts, contrary to the White House's analysis, are in fact cheaper for investors. He said that commission accounts have lower up-front fees, and advisory accounts have higher up-front fees. In an advisory accounts, clients pay a fixed fee based on the assets they have. Advisory accounts already operate based on a fiduciary duty to clients.
Bentsen's argument willfully sidesteps the whole point of commission-based accounts: the commissions! Theoretically, commission accounts can be very cheap if you don’t pay commissions. But practically, brokers make sure retail investors pay commissions, or put money into funds with high fees. Bentsen is comparing actual advisory account fees with a fantasy version of a commission account that few retail investors have ever encountered.
Bentsen argued that without the commission fees, small investors who use these types of accounts would be unprofitable for brokers, meaning no adviser would be willing to handle their retirement account.
But in the age of low-cost advisory products offered by wealth management giants like Fidelity and Vanguard, that argument is far-fetched. There are entire businesses dedicated to provide advisory services to just those people Bentsen claims will be left out in the cold.
Bentsen's line of thinking is also telling.
“The financial services industry likes to claim that if they need to work in the best interests of their customers, they can't afford to serve them,” personal finance author Helaine Olen told The Huffington Post. “Think about that for a moment.”
SIFMA would probably prefer that you didn’t.