(Bloomberg View) — Wall Street is wasting no time revving up its lobbying machine now that President Barack Obama has said his administration soon will propose a rule to require brokers to act as fiduciaries when advising clients on their retirement savings.
Asking brokers to put clients’ interests ahead of their own seems like a good idea, yet industry trade groups argue the rule will make investment advice and retirement planning too expensive for low- to middle-income families. If that happened, the argument goes, those families would save less for retirement and, down the road, could be a burden on taxpayers.
One industry group, the National Association of Plan Advisors, which represents professional retirement-plan advisers, goes so far as to call the proposal the “No Advice” rule.
This sounds alarming! Is Obama about to make worse the very problem — too little retirementsavings — he says he wants to fix?
That’s the thrust of a memo written by the law firm Debevoise & Plimpton for the Financial Services Roundtable, which represents the chief executive officers of banks, insurers and asset managers. The main evidence comes from a 2011 study by consulting firm Oliver Wyman, which has come to represent the core of the industry’s argument.
That study says lower-income investors prefer to work with brokers (who don’t have a fiduciary duty and are paid through sales commissions, revenue-sharing deals and other fees) over registered investment advisers (who are paid directly out of a client’s pocket and already must put client interests ahead of their own).
The report, which the main Wall Street trade group, the Securities Industry and Financial Markets Association, also cites, isn’t a scientific study. It was paid for by 12 financial-services companies. It doesn’t use statistical measures, such as random sampling, but relies on data the 12 companies aggregated from customer accounts. And it doesn’t actually ask savers what they prefer. Oliver Wyman didn’t respond to requests for comment.
Yet the study concludes that lower-income savers prefer brokers who have no fiduciary duty, because the majority of the companies’ savers used a broker when they invested in an individual retirementaccount.
That circular argument overlooks the fact that many investors use brokers simply because they think it’s cost-free. Studies show investors don’t understand that there are hidden costs associated with brokers, eroding savings over time.
The biggest indirect cost is the conflict of interest brokers can face. Mutual-fund sponsors reward brokers who send client money their way. But the performance of broker-sold funds, many of them actively managed, on average is lower than that of the low-cost index funds that many investment advisers recommend.