By Cyril Tuohy
The question before financial advisors is: Which threshold will the government require when it comes to advising retirement plan participants?
Will the U.S. Department of Labor and the Securities and Exchange Commission (SEC) require financial advisors to meet a fiduciary threshold in which client needs – without exception – are placed before the needs of the advisor or the broker-dealer the advisor represents?
Or will the government remain satisfied with financial advisors meeting the lower “suitability” threshold, now in effect?
Discussion around the application of fiduciary standards for financial advisors was rekindled this week in the wake of the PBS “Frontline” documentary, “The Retirement Gamble,” which aired recently to a nationwide audience.
The documentary questioned the effectiveness of 401(k) plans and the retirement advice individuals and plan sponsors receive from investment advisors who have a vested interest in steering plan participants to funds that commission-based advisors represent.
“I would argue you should almost always be with somebody who has fiduciary duties,” said Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry, who was interviewed by “Frontline.”
“The only time you might not is if you wanted to buy bonds or individual stocks. It is going to be quite hard to find somebody, as of right now, working to the fiduciary standard.”
She said that 401(k)s have failed retirees, in part because those who sell and advise plan participants are only required to meet a “suitability” standard, which doesn’t guarantee that interests of participants are put first, the documentary noted.
<p> Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research, told “Frontline” that the type of financial advisor plan participants typically run into at a mutual fund call center or in a local bank exhibit two standards of loyalty: one to their profession and another to their company.
This is in contrast to an advisor in a traditional retirement plan governed by the fiduciary standard of loyalty to a client.
“A professional standard that your guy is guided by is a much lower standard than a duty of loyalty or fiduciary standard,” Ghilarducci said. “Basically, your guy is out for himself to maximize his sales, and the way he does it is to be loyal to the mutual fund. And they try to sell you the most profitable products.”
Not so, or at least it’s not that cut and dry, according to the National Association of Insurance and Financial Advisors (NAIFA), which represents more than 50,000 members. Imposing a stricter fiduciary-duty standard would limit plan participants’ access to products, services and advice – particularly participants in small plans, NAIFA said.
“If advisors are precluded from offering commission-based products, consumer choices will be limited, and many may not be able to afford advisor fees,” NAIFA said in a posting on its blog. “Additionally, if advisors’ liability and costs increase, advisors may not be able to afford to work with small accounts or IRA holders.”
The U.S. Department of Labor is seeking to update the definition of fiduciary advice, which dates back to 1975 under the Employee Retirement Income Security Act (ERISA) when 401(k)s and IRAs had not yet developed into mainstream retirement vehicles.
The Labor Department is expected to release new rules governing advisors and their fees and commission structure in July and, for months, all manner of financial industry lobbyists have been pushing hard to sway government regulators to their view.
Employee Benefits Security Administration (EBSA) assistant secretary Phyllis C. Borzi said the department would insist on nothing less than the “strongest possible protections to business owners and retirement savings in plans and IRAs.”
"Investment advisors shouldn't be able to steer retirees, workers, small businesses and others into investments that benefit the advisors at the expense of their clients,” said Borzi. “The consumer's retirement security must come first.”
Last year, Morgan Keegan and Co. agreed to pay more than $633,000 to 10 pension plans covered by ERISA following the Labor Department’s EBSA investigation that found the full-service brokerage company steered employee benefit plan clients to hedge funds between 2001 and 2008.
Under the settlement terms, Morgan Keegan will disclose to ERISA clients whether it is acting as a fiduciary to those plans, and if so, reveal its compensation arrangements.
Cyril Tuohy is a writer living in Pennsylvania. He has covered the financial services industry for more than 15 years. He has also written about food, restaurants and travel. He can be reached at [email protected]
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