Doctors have a sworn obligation to put the best interests of their patients' above all other interests, including their own. Lawyers have a professional responsibility to protect the best interests of their clients above any other interests, including their own. But, remarkably, financial advisers are allowed to recommend products to unsuspecting customers that are a great deal for the adviser, but not for the person seeking advice. While most advisors put their clients' interests first, some do not, and there has been no law to stop them. That has cost Americans an estimated $17 billion annually, and, to most people, makes no sense at all.
Yesterday, the Obama administration changed that by unveiling new guidelines that establish a professional and legal obligation for retirement advisors to provide advice that puts their clients' interests first.
The last time the federal government made significant changes to protect Americans' retirement savings was in 1974, when Congress passed the Employee Retirement Income Security Act (ERISA). The retirement landscape has changed dramatically since the 1970's. Two of the biggest ways Americans save for retirement today -- 401(k)'s and Individual Retirement Accounts -- didn't even exist when President Gerald Ford signed ERISA into law. New savings opportunities have increased, but so also has complexity, making retirement savings murkier and more difficult for advisors and retirees to navigate.
It's long past time for consumer protections to catch up to modern realities.
The majority of retirement advisors provide responsible and sound advice to their clients. They already have their clients' interests at heart, which is why formalizing their best practices into a professional obligation isn't such a dramatic shift. Indeed, groups representing investors, investment professionals and experts like the Committee for the Fiduciary Standard support this rule change. Many industry leaders agree that retirement advisors must be held to the highest legal and professional standards.
But that doesn't mean that these reforms aren't powerfully important. Because of outdated retirement laws, advisors can steer investors into products that earn free vacations, cars, bonuses, fees, and other perks for themselves, but that may be lousy for their clients. And the retirement advisors who put their own personal financial interests ahead of their clients cost Americans billions every year. Older Americans who are closer to retirement are particularly at risk of suffering damages from bad advice because they simply don't have enough time to recover from these losses.
The establishment of a new, higher standard for retirement advice comes at a critical time.
Americans are retiring later in their lives than ever before. Hardworking families struggling to make ends meet have a difficult enough time saving money for retirement. Over 30 percent of Americans don't have any retirement savings. We know that in the wake of the financial crisis, the total value of retirement savings accounts actually increased to a record high, but that retirement readiness for the average American steadily decreased. And disparities in retirement savings are both indicative of and exacerbate existing inequalities. More than half of lower income Americans don't believe a comfortable retirement is attainable, major gaps in retirement savings persist between women and men, and minority households are less likely to have retirement savings accounts than their white peers.
Americans who work hard and play by the rules deserve to be able to retire comfortably with the dignity and security they have worked so hard for. For something as important as a family's retirement savings, there's no reason the retirement services industry shouldn't be held to a standard like that of other professions handling such serious matters.
Fairness and opportunity don't need to be mutually exclusive.
DOL's new Conflict of Interest regulations mark an important step toward making saving for retirement easier, fairer, and more secure for all Americans.