There has been a lot of talk lately about the Department of Labor’s proposed Conflict of Interest Rule. If approved, the rule will expand fiduciary regulations to cover all retirement accounts, meaning that consumers will be further protected from financial advice that is not in their best interest when it comes to retirement savings.
The Department of Labor opened for commentary from the public on the proposed rule, and Personal Capital CEO, Bill Harris, submitted a response. Here’s a peek into what he said on the matter:
Why “Best Interest” Matters
The traditional relationship between a broker and a client is built around sales. Advice that a broker gives a client is systemically conflicted, because brokers are incentivized to recommend products that earn them money. When those products do not serve a client’s best interests, customers end up with suboptimal investment strategies.
In contrast, the relationship between an advisor and a client is advice-oriented. True advisors are paid on a fee-only basis, meaning their incentive is to provide the best, unbiased advice possible to clients. Advisors are paid the same regardless of what investment products they put their customers in.
When it comes to long-term investing, such as planning for retirement through 401k, 403b and IRA accounts, it is critical that clients receive advice in their best interest, not advice that makes their broker wealthy.
Lack of Better Alternatives
Current regulatory structures don’t protect consumers who get their investment guidance from traditional or online brokers not working under a fiduciary or “best interest” standard. And to make matters worse, Registered Investment Advisor (RIA) regulations enforced by the Securities and Exchange Commission aren’t likely to be applied consistently to individual brokerage or 401k accounts any time soon, as industry groups have fought against such expanded protection for years.
How Consumers Are Affected
Access to unconflicted financial advice matters when consumers are working hard to secure their retirement savings. Luckily, three trends are converging to create better solutions for consumers:
1. The financial industry is continuing to evolve from a brokerage model to an advisory model.
2. There is a transition from high-cost active investing to low-cost index investing.
3. Use of electronic financial advice and investment management is on the rise.
The risk of underfunded retirement needs is the largest looming financial crisis in America, and wider fiduciary regulation could help to secure the retirement prospects of millions of Americans.
How Current Providers Are Affected
Current providers do have the ability to deliver financial advice in the best interest of their customers, but there is room for significant improvement throughout the industry as a whole. Traditional brokers have very profitable business models that can be adopted to and enhanced by a commitment to the needs of their customers. Existing RIAs will continue to follow the fiduciary standard, and the fact that all competitors must do the same will level the playing field.
New Solutions From Emerging Providers
Personal Capital is among a handful of new providers that combine technology with online connectivity to give consumers better financial advice and investment management. We, and providers like us, are true advisors (not brokers) who operate under the current fiduciary standard. Like our peers, our mission is to give more people access to better financial advice, at a lower cost.
Access To Financial Advice For Everyone
New online financial solutions appeal far and wide to younger generations, but the largest segment of online financial solution users is still between 30 and 60 years old. This stems from the fact that as people get older, they lead more complex financial lives, have more financial accounts (our customers have an average of 15 accounts) and increase focus on retirement goals. Many of our users are also families, and even retirees.
One way or another, technology is creating access to comprehensive financial advice to just about everyone, for free.
Americans have been losing money to the brokerage model for far too long, when they could be saving more for retirement. It’s our responsibility to ensure that retirement savers are protected with a ruling such as the Conflict of Interest Rule, and we hope that the Department of Labor will finalize and implement this rule as soon as possible.