The financial-advice regulations pushed by the Obama administration will save retirees, on average, an estimated $12,000.
When you are planning for retirement and ask for advice, whose interest should come first — yours or the financial expert you ask for help?
That is the question at the heart of a Washington debate over the unsexy-sounding term “fiduciary standard.” Simply put, it is a legal responsibility requiring an adviser to put the best interest of a client ahead of all else.
The issue has been kicking around Washington ever since the financial crisis, and it took a dramatic turn on Monday when President Barack Obama gave a very public embrace to an expanded set of fiduciary rules. In a speech at AARP, the president endorsed rules proposed by the Department of Labor that would require everyone giving retirement investment advice to adhere to a fiduciary standard.
The president’s decision to embrace and elevate fiduciary reform into a major policy move is huge.
“The White House knows that this is the most significant action it can take to promote retirement security without legislation,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, which has been pushing for adoption of the new fiduciary rules.
Today, financial planning advice comes in two flavors. Registered investment advisors (RIAs) are required to meet a fiduciary standard. Most everyone else you would encounter in this sphere — stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies — adhere to a weaker standard where they are allowed to put themselves first.
“Most people don’t know the difference,” said Christopher Jones, chief investment officer of Financial Engines, a large RIA firm that provides fiduciary financial advice to workers in 401(k) plans.
The difference can be huge for your retirement outcome. A report issued this month by the President’s Council of Economic Advisers found that retirement savers receiving conflicted advice earn about 1 percentage point less in returns, with an aggregate loss of $17 billion annually.
The report pays special attention to the huge market of rollovers from workplace 401(k)s to individual retirement accounts — transfers which often occur when workers retire. Nine of 10 new IRAs are rollovers, according to the Investment Company Institute mutual fund trade group. The CEA report estimates that $300 billion is rolled over annually, and the figures are accelerating along with baby-boom-generation retirements.
The CEA report estimates a worker receiving conflicted advice would lose about 12% of the account’s value over a 30-year period of drawdowns. Since the average IRA rollover for near-retirees is just over $100,000, that translates into a $12,000 loss.
What constitutes conflicted advice? Plan sponsors — employers — have a fiduciary responsibility to act in participants’ best interest. But many small 401(k) plans hire plan recordkeepers and advisers who are not fiduciaries. They are free to pitch expensive mutual funds and annuity products, and industry data consistently shows that small plans have higher cost and lower rates of return than big, well-managed plans.
The rollover market also is rife with abuse, often starting with the advice to roll over in the first place. Participants in well-constructed, low-fee 401(k)s most often would do better leaving their money where it is at retirement; IRA expenses run 0.25 to 0.30 percentage points higher than 401(k)s, according to the U.S. Government Accountability Office. Yet the big mutual fund companies blitz savers with cash come-ons, and, as I wrote recently, very few of their “advisers” ask customers the basic questions that would determine whether a rollover is in order.
The industry makes the Orwellian argument that a fiduciary standard will make it impossible for the industry to offer cost-effective assistance to the middle class. But that argument ignores the innovations in technology and business practices that already are shaking up the industry with low-cost advice options.
How effective will the new rules be? The devil will be in the details. Any changes are still a little far off: TheDepartment of Labor is expected to publish the new rules in a few months — a timetable that already is under attack by industry opponents as lacking a duly deliberative process.
Enough, already. This debate has been kicking around since the financial crisis, and an expanded fiduciary is long overdue.
Q. My new car has been in the shop for a month. Will a “lemon law” be of help? — Mark Wisner, Morrisville, N.C.
A. Assuming your car is deemed a lemon, you’re entitled to—your choice—either a replacement car or a purchase price refund (see below). The definition of “lemon” varies by state; in your home of North Carolina, a car qualifies if it has been out of service for a total of 20 business days over 12 months or has been repaired for the same problem at least four times. The car must have fewer than 24,000 miles on it and be less than 24 months old.
Before submitting a claim, notify the manufacturer in writing of the problem (via certified mail) and give the company a reasonable chance to fix it, says Rosemary Shahan, president of Consumers for Auto Reliability and Safety. Check your state attorney general’s office for details, and carefully document your complaints and attempted repairs.
Top management must be held accountable for a pattern of inaction and the auto company's uncommunicative committee structures.
The ongoing and tragic General Motors debacle involving the mishandling of the fatal ignition switch defect reached its latest milestone with the release last week of a company-commissioned 315-page report by former U.S. Attorney Anton Valukas. Valukas condemned GM’s “troubling disavowal of responsibility” that led “to devastating consequences.” He declared that for more than a decade, the facts about these faulty switches that took the lives of motorists by stalling and depowering the vehicles thrashed around an “astonishing number of committees” inside GM’s sprawling silo-like bureaucracy.
What Valukas delivered for top GM management was concisely described by Sen. Richard Blumenthal (D-CT), who said, “It seems like the best report money can buy. It absolves upper management, denies deliberate wrongdoing and dismisses corporate culpability.”
The Valukas Report concluded that there was no cover-up, even though GM’s new CEO Mary Barra attributed the delay to a “pattern of incompetence and neglect.” She dismissed mid-level employees, some senior level managers, disciplined five others and installed new executives to supposedly shape up the place.
In her speech to 1,000 GM employees, Barra began to get at the core problem when she declared that employees should report failures to their supervisors and, if that doesn’t work, to “contact me directly.” This is not remotely the right sequence. Few employees would expose their careers to such potential retaliation by the “cover their rear” attitude of the GM hierarchy.
The report cites what has become known as the “GM nod”: “The GM nod, Barra described, is when everyone nods in agreement to a proposed plan of action, but then leaves the room with no intention to follow through, and the nod is an empty gesture.” Other witnesses explained the “GM salute, a crossing of the arms and pointing toward others, indicating that the responsibility belongs to someone else.”
Meanwhile, year after year, nearly 3 million Chevrolet Cobalts and Saturn Ions, among others, carried this lethal but easily fixable defect, resulting in highway crashes, deaths and injuries. Not until February of this year did GM announce the recall of millions of these cars. Nor did the Department of Transportation act to compel such a recall, even though it knew about the defect for years. Finally, this year, it fined GM the maximum sum of $35 million.
How can top management not be held accountable for such a pattern of inaction, such a miasma of evasive, uncommunicative committee structures, such a malfunctioning chaos of mortal information not being passed on to the top officials of the company? Taken together, it clearly was a 13-year institutional cover-up.
Clarence Ditlow, longtime GM watchdog and head of the Center for Auto Safety, which I co-founded, called the Valukas report “little more than an elaborate whitewash that buys into GM’s arguments that it was a bunch of incompetent engineers, lawyers and mid-level managers who were fired as a result.” Ditlow argues that “GM has a corporate culture where denying safety problems has been prevalent and taking responsibility for safety defects has been rare.” He also faulted the report’s “buying into the company’s argument that this is just an airbag defect – yet stalling has been the subject of over 300 safety recalls from all companies from 1966-2013. The Valukas report ignores the 2004 death and injury Early Warning Reports (EWR) filed by GM on the models covered by the ignition switch recall through 2013.”
Incredibly, the ignition switch hazard was classified as a “customer convenience issue,” rather than an urgent safety failure. But as former National Highway Traffic Safety Administration physicist Dr. Carl E. Nash told me, GM has a long history of denial, delay, cover-ups and blaming everyone but itself for millions of serious defective motor vehicles.
GM is bracing for the results of the Justice Department’s criminal investigation, the Securities and Exchange Commission’s probe, and the two Congressional Committees’ ongoing inquiries, all of which lie ahead. But on its own, GM must act to compensate the bereaved families and the injured survivors in product-defect crashes both before and after its 2009 bankruptcy and its $50 billion government bailout. The kangaroo court of corporate bankruptcy dissolved existing personal injury claims, stripping the victims of their constitutional rights to have their day in court.
Secondly, shuffling personnel and rearranging committees will not do the job Barra says she wants done. What will be effective is if she establishes an independent ombudsman who confidentially receives complaints from internal whistle-blowers and reports them directly to GM’s CEO and President, as well as to the Department of Transportation. As Nassim Taleb wrote in his recent book Antifragile, nothing is more productive of accountability than top bosses having “skin in the game.”
Providing a monetary incentive to the reporting employee for saving the company a boatload of trouble and averting highway tragedies will also help. Companies often give money to workers who suggest dollar-saving ways to run production or distribution lines. GM can certainly do the same for internal life-saving reports by conscientious GM personnel.
Ralph Nader is a consumer advocate and author of Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State.
More than 100 million eBay users' account information may have been compromised in a cyberattack
Attorneys General in three U.S. states along with European officials are investigating a massive data breach at eBay which may have compromised more than 100 million users’ passwords.
“The magnitude of the reported eBay data breach could be of historic proportions, and my office is part of a group of other attorneys general in the country investigating the matter,” said Florida Attorney General Pam Bondi in a statement Thursday.
The Federal Trade Commission and Attorneys General in Illinois and Connecticut have also vowed to conduct a probe into the incident.
“My office will be looking into the circumstances surrounding this breach as well as the steps eBay is taking to prevent any future incidents,” said Connecticut Attorney General Jepsen in a statement Thursday. “However, the most important step for consumers to take right now is to change their password and to choose a strong, unique password that is not easily guessed.”
Officials in the UK have promised to investigate as well, the Guardian reports.
“We’re certainly looking at the situation,” Christopher Graham, the UK’s Information Commissioner, told the BBC. “We have to work with colleagues in Luxembourg where eBay is based for European purposes. We were in touch with the Luxembourg data protection authority yesterday.”
EBay notified users of the data breach Wednesday. The company has urged all users to change their passwords, but it said no financial data was compromised in a cyberattack that took the company weeks to detect.
Need tips on how to set a strong password? Watch the video above.
Personal finance from around the Web:
- College students are spending too much time drinking and having sex. The solution? A grade-inflation tax on colleges. [Center for College Affordability and Productivity]
- Senator Chris Dodd will propose this week that the Fed should assume regulatory control over big banks ($100 billion in assets or more). [Daily Beast via Financial Times]
- Happy 10th Anniversary JetBlue! Today only, you can book a $10 flight to any of the first 10 cities the airline offered service to from JFK when it launched back in 2000. [Baltimore Sun]
- Amid all of the Oscar hype, how much is that statue actually worth? Based on current gold values, a melted-down Academy Award is worth around $500. [WalletPop]
- According to the Federal Trade Commission, this week is National Consumer Protection Week. Consumers can find links to free and useful information at consumer.gov. But, just in case you were curious, here’s how to file a consumer complaint with the FTC. [The Consumerist | Digerati Life]
Follow MONEY on Twitter at http://twitter.com/money.
Will Congress blow a once-in-a-generation chance to help Americans get better financial advice? It looks increasingly likely.
One of the biggest problems people have when they receive financial advice is that they don’t always know where a financial professional’s motivation and self-interest really lie. When you show up at a new-car dealership, it’s pretty obvious what a salesman wants: If it’s a Ford lot, he wants to sell you a Ford. But you know that going in, so you can filter what he says with proper skepticism.
The world of stocks, bonds and other financial products, however, is a lot more mysterious.
Some professionals are obligated to put your interests above theirs, meeting what’s called a “fiduciary” standard. (Think of them as human versions of Consumer Reports, advising you to buy the best possible car at the best possible price.) Others are required only to pass a litmus test known as “suitability,” leaving them room to sell you financial products that are a great deal for them, but might not be the best for you. (Think of them as car salesmen steering you toward the model that reaps them the biggest commission but has the worst repair record on the lot.) Still others wear both hats: At certain times when they work with you, they have to meet fiduciary standards, but at other times their recommendations just have to be suitable. You might not even know how they’re being paid: Maybe it’s a fee you pay them, or maybe they earn a commission from the company whose product they’re selling you. Or maybe they make money both ways.
Is that confusing? Of course it is. A RAND Corporation study released by the Securities and Exchange Commission two years ago contains plentiful evidence that even well-educated investors have no idea what financial professionals’ obligations are, or where their self-interest lies. For example:
- Ninety-six percent of surveyed investors understood that brokers receive commissions on a client’s purchases or trades. But only 34% believed that “financial advisers” or “financial consultants” receive such commissions. Problem is, brokers, advisers and consultants are often the same thing: A “financial consultant” is simply a broker with a new business card.
- Fifty-eight percent of investors thought that brokers were legally obligated to disclose any conflicts of interest. For the most part, they aren’t.
- The legal distinction between “fiduciary duty” and “suitability” in the investment world has been around for 70 years, but the American public, after all this time, still has no clue what the terms mean. “Even though we made attempts to explain fiduciary duty and suitability in plain language,” explained woeful RAND researchers, “focus-group participants struggled to understand the differences….”
So what does this have to do with Congress? Everything. The financial-protection legislation that’s been kicking around Washington contains measures that may change how financial professionals dispense financial advice. But in recent days, reports have circulated that vigorous pro-consumer measures in this area that were proposed last fall are being weakened in back-room negotiations. Most relevantly, the trade journal InvestmentNews and other sources have reported that the Senate Banking Committee, headed by Chris Dodd (D-Conn.), is backing away from a prior proposal to impose the strict, best-interest-of-clients fiduciary standard on brokers who give investment advice. Instead, apparently, the committee will propose that the SEC conduct an 18-month study of regulations for financial advisers and then report back with possible measures.
Supporters of the fiduciary standard hate that scenario. “That’s certainly not good for the consumer,” says Bob Glovsky, chairman of the CFP Board of Standards, an organization that certifies financial planners and which has teamed with two other industry groups, the FPA and NAPFA, to lobby Congress on the subject of financial planning services. There’s already plenty of evidence — including the 204-page RAND study — that consumers would benefit from a fiduciary rule imposed on brokers, he says. “We know the consumer is confused,” says Glovsky. Replacing the mandate with a study, he says, is “really just punting it down the road.”
Unfortunately, Congress is looking awfully weak in the knees when it comes to protecting the public’s personal finances. Other reports indicate, for example, that Dodd and the Senate Banking Committee are thinking about making the proposed Consumer Financial Protection Agency not an independent watchdog, as originally envisioned, but an office inside the Federal Reserve — an institution which over the past few years proved to be spectacularly terrible at protecting individuals from financial-industry excesses. Let’s hope that, before Americans’ resolve to shore up financial protection fades away, Congress doesn’t lose its nerve.
Follow MONEY on Twitter at http://twitter.com/money.