Who's to Blame for Failure to Protect Your Retirement Funds

Your Retirement Funds are at Risk With Your Broker

There is much in this blog about the failure of the financial services industry to act in your interest. And why should they as they don't have to? They can charge you high commissions and fees and continue to sell you things that are merely "suitable" but DO NOT need to be in your best interest. The law allows the securities industry to do that. The White House wants to change that.

Two Types of Investment Professionals

Let's step back and recall that there are two types of investment professionals available to help you.

The more numerous type we previously called stockbrokers. Currently, these professionals go by the title, "financial advisor." However, "financial advisor" is somewhat of a misleading term as they have no responsibility to advise you. These individuals are salespeople. They are paid commissions based on what they sell. Their responsibility is to their firm and not to you. They of course present themselves as your advisor and your ally who looks out for your best interest.

Most of these people are well-meaning and actually do want to do well for you. By doing well for you and retaining you as a client, they will earn more commissions over time. Therefore, they want to keep you happy out of their own self-interest as well as a personal moral obligation. But when push comes to shove, just know that they don't work for you; they work for a securities firm that provides their paycheck.

These financial advisors are regulated such that their only responsibility to you is to recommend and sell you what is suitable. Basically, this means that they can't sell you something unsuitable but they certainly do not need to find the best alternative for you. Suitable recommendations would include any security that fits your financial profile, your age, your tolerance for risk and yet be loaded with commissions and fees. The White House wants to change this as I describe below. The White House wants to force these individuals to act in your best interest when advising on your retirement accounts.

The other group of professionals, a much smaller group, are licensed as registered investment advisors. Legally, these professionals must operate within your best interest. They do not earn commissions and are often paid as a percentage of your portfolio size. For example, on a $200,000 portfolio, these individuals charge 1% or $2000 per year. They have no incentive to sell you anything as they don't receive commissions.

When retaining a registered investment advisor, you are basically paying for their advice and management skill in handling your portfolio. These professionals must act as fiduciaries, i.e., they must act in your best interest. The White House proposal would not affect these people as they already act in your best interest and should be the type of professional you hire anyway.

The White House Wants to Protect Your Retirement Accounts

A study by the White House Council of Economic Advisers has found that financial advisors seeking higher fees and commissions drain $17 billion a year from retirement accounts by steering savers into high-cost products and strategies rather than comparable lower-cost ones. Here is what the Council told the White House:

• Conflicted advice leads to lower investment returns. Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return).
• An estimated $1.7 trillion of IRA assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.
• A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.
• The average IRA rollover for individuals 55 to 64 in 2012 was more than $100,000; losing 12 percent from conflicted advice has the same effect on feasible future withdrawals as if $12,000 was lost in the transfer.

Having been in the investment industry, I would argue that the cost to retirees is much larger than $17 billion annually. So many lousy and inappropriate investments are sold and I estimate that the cost of this is a lot more than 1% annually to account holders.

The current Administration can act by requiring that financial advisors act as fiduciaries regarding retirement accounts.  However, given the vested interests in these matters, it is possible that Congress could attempt to wrest this issue away from the Administration. If so, this issue will come before Congress to vote upon.

Will Congress Protect Your Retirement Account?

Congress can either vote:

1. To require that your investment professional act as a fiduciary regarding investments in your retirement accounts. A fiduciary must look out for your best interests. This would change the face of the investment industry as your financial advisor (currently a sales person acting in the best interest of his firm) would need to act in your interest and stop selling you crap that is merely "suitable."
2. To leave matters as they are. Why would your congressperson vote for this option? Because they get BIG contributions from firms like Merrill Lynch or Ameriprise who like things exactly as they are.

The securities industry has held Congress and the Securities and Exchange Commission (SEC) hostage. The industry gets their way most of the time due to their financial influence with members of Congress (i.e., political contributions. So the people who are there to protect you on your investing - Congress and the SEC - have sold you out. Or, they are simply incompetent. (The SEC repeatedly ignored warnings about Bernie Madoff).

Therefore, if Congress votes to leave matters as they are, IT'S YOUR FAULT. You need to tell your Congressperson that you will be watching how they vote on this issue and you will not accept their kowtowing to special interests. By the way, you might ask your Congressperson why he never acted on this issue before now.

The moral of this story is that money talks and yours needs to speak up.

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