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Friday, October 28, 2016

By David Nicklaus, St. Louis Post-Dispatch (TNS)

In the great retirement savings debate, all sides say they want to protect the little investor. They differ on what he or she needs protection from.

President Barack Obama thinks the danger is unscrupulous brokers. His Council of Economic Advisers published a study last week estimating that families lose $17 billion of their retirement savings every year to hidden fees and adviser conflicts of interest. The president ordered the Labor Department to issue a rule holding all retirement advisers to a higher standard.

What Obama is proposing is a fiduciary rule. It would require anybody managing retirement assets, from a company 401(k) to an Individual Retirement Account, to act in the investor’s best interest.

Most investors probably think their adviser already meets that standard — and some do. Brokers, however, are only held to a lesser, suitability standard. That allows firms to sell you an investment that’s most profitable for them, even if it’s not the best one for you.

The securities industry, predictably, would like to keep it that way. Industry groups issued statements saying that the proposed rule would hurt the same small investors whom Obama wants to protect.

In the industry’s version of the future, the little guy may lose access to any financial advice — unless, of course, brokers are allowed to continue with their current conflict-riddled business model.

If that’s the best defense the industry can muster, it’s on pretty shaky ground.

For one thing, it’s not clear that costly, conflicted advice is better than none at all. FINRA, the industry’s self-regulatory body, warned advisers last year to stop misleading people about IRA rollovers. Often, investors are better off staying in their old company’s 401(k).

Secondly, individuals can find sources of unbiased, low-cost advice. Plenty of advisers charge either a flat fee or a percentage of assets. If your account isn’t big enough to make their services worthwhile, a new breed of so-called robo advisers, including Wealthfront and Betterment, suggest asset allocations for fees of about 0.25 percent of assets. Charles Schwab is launching a similar service for people with as little as $5,000 to invest, and other traditional firms are likely to follow.

Susan Conrad, a vice president at Plancorp in the St. Louis area, is confident that people with modest retirement savings will still be able to find advice. “Our industry has always had to morph and change to align with regulations and evolving best practices,” she said. “The industry will create products that are reasonable for the smaller investor.”

The evidence keeps piling up to show how investors are damaged by industry practices. Thomas Doellman, an assistant professor of finance at St. Louis University, did research on 6,800 401(k) plans and tried to determine why some performed significantly worse than others.

The poor performers had a couple of characteristics in common: Their fees were above average, and they tended to be run by administrators, such as banks and brokerage firms, that used their own proprietary investment funds.

“This is an obvious conflict of interest,” Doellman notes, but it’s permissible under current rules. The money managers are allowed to make money at 401(k) investors’ expense, and that’s a shame.

Small investors will be helped, not hurt, by the protections Obama is proposing. For the financial industry to argue otherwise is not only disingenuous, it’s dishonest.

© 2015 St. Louis Post-Dispatch, Distributed by Tribune Content Agency, LLC