PD Editorial: Protecting retirement nest eggs

When consulting a financial adviser, is it reasonable to assume that the recommendations are what’s best for you, not what benefits the adviser?

Maybe not.

When it comes to retirement savings, a recent report from the White House Council of Economic Advisers says “the best recommendation for the saver may not be the best recommendation for the adviser’s bottom line.”

Indeed, the report estimates that $17 billion a year is drained from individual retirement accounts by steering clients away from low-cost funds and into funds and investment strategies that deliver bigger fees for the adviser. And that’s perfectly legal.

It wouldn’t be under a rule proposed this week by the U.S. Labor Department.

The rule would require brokers to put their clients’ interests ahead of their own when they make recommendations on retirement savings.

“This boils down to a very simple concept: if someone is paid to give you retirement investment advice, that person should be working in your best interest,” Labor Secretary Thomas E. Perez said Tuesday. “As common sense as this may be, laws to protect consumers and ensure that financial advisers are giving the best advice in a complex market have not kept pace.”

Investment advisers registered with the Securities and Exchange Commission already are required to put their clients’ interests first. But that fiduciary duty doesn’t extend to brokers who give investment advice.

Not surprisingly, opposition from brokerage firms has delayed implementation of the rule.

A fiduciary duty for brokers was included in early drafts Dodd-Frank financial reform bill, but the final version was watered down significantly, requiring only a study of the issue by the SEC. The study, published in 2011, concluded that a fiduciary rule should be adopted.

Four more years passed before a rule was promulgated, and industry resistance is likely to continue until the rule is enacted. Critics say an enforceable fiduciary duty would drive up the price of investment advice.

From all appearances, many people are getting bad advice. That has a price, too.

The rule reflects sweeping changes in how most Americans save for retirement over the past four decades. In the private sector, the share of workers with defined-benefit pensions has dropped sharply, and the reliance on defined-contribution plans - mostly 401(k) plans and individual retirement accounts - has grown exponentially.

Accompanying that shift is greater individual responsibility for managing retirement savings and, in turn, more people - many of whom aren’t sophisticated investors - are seeking financial advice.

Pension fund managers have a fiduciary duty to plan participants. Brokers advising individuals on their retirement savings should, too.

Even if the Labor Department’s proposed rule survives opposition from the brokerage industry, individual investors should remember that their best protection is doing research, asking questions and reading the fine print. But their brokers shouldn’t be competing with them for their money.