America Can’t Afford Wall Street’s Terrible Investment Advice

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Should the companies managing your 401(k) be allowed to sell you products that they know will actually make your retirement less secure? That’s the question being debated in Washington, as regulators mull rules that would require the financial-services industry to act in the best interest of its clients when giving advice on which investments to buy.

This fall, the Department of Labor is expected to issue a new rule that would impose a “fiduciary duty” on investment professionals who service company-sponsored retirement accounts, like 401(k)s, as well as individual retirement accounts (IRAs). But in a somewhat surprising move earlier this summer, 32 liberal Democratic representatives sent a letter to then Acting Secretary of Labor Seth Harris urging him to reconsider the department’s plans, arguing that it “could severely limit access to low-cost investment advice.”

This is a curious statement, since what they are essentially saying is that if the industry were forced to give only sound advice in good faith, it would be less profitable and therefore forced to stop serving investors with smaller accounts.

(MORE: Will Wall Street Finally Put Clients First? Maybe Some Day, but Don’t Hold Your Breath)

It shouldn’t come as a complete shock, then, that on Tuesday, Mother Jones magazine revealed that the letter was actually written by Robert Lewis, a lobbyist for the Financial Services Institute, which is backed by the investment-advisory industry. According to the report, these lawmakers have received more than $80,000 in contributions from the securities-and-investments industry during the past election cycle, fueling speculation that these representatives are more concerned about the financial industry’s profits than they are about protecting the interest of the average investor.

It does seem strange in this time of acute partisan discord that congressional representatives of both parties are in agreement that the Labor Department rule — and a similar but potentially broader rule under consideration by the SEC — is cause for such concern. In recent weeks, both House Republicans and Senate Democrats have made efforts to slow or stop the implementation of the fiduciary rule.

Would lawmakers from both parties be falling over themselves to roll back these regulations if it weren’t for the hundreds of lobbyists and hundreds of thousands of dollars the financial-services industry has been sending to Washington this summer? It’s impossible to know for sure, and, of course, lawmakers’ public statements make it appear as if their concern is for the average investor rather than for the industry. But if the fear is that these rules will “limit access to low-cost investment advice,” then opponents of the rule should be pretty sure that advice the financial-services industry is selling is worth the price we’re forced to pay for it.

The thing is, it’s clearly not. Over the past 30 years, a confluence of forces has changed the American retirement system from one largely reliant on defined-benefit pension plans to a system based on individual retirement accounts that workers are responsible for managing themselves. The results have been disastrous. Workers have a difficult time saving enough money needed for a secure retirement, and when they do, they are taken advantage of by a financial-services industry that steers them into expensive products that do more to pad the industry’s bottom line than to build up retirement savings. The result is a vastly underfunded retirement system, and a generation of soon-to-be-retirees who have no idea how they’ll support themselves once they’re no longer able to work.

(MORE: How to Make the Most of Your 401(k) in 2013)

It’s not for a lack of effort on workers’ part, however. According to the Investment Company Institute, Americans have invested roughly $19.5 trillion in retirement assets in 401(k) accounts, IRAs and other retirement-investment vehicles. This massive pile of cash is a big moneymaker for the financial-services industry, generating tens and possibly hundreds of billions of dollars per year in fees.

While these fees are huge in the aggregate, they easily escape the attention of the typical saver. The average mutual fund charges just 1% or 2% in fees, but those charges end up costing you a lot over the long run. As the Department of Labor explains:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.

Meanwhile, investors could be parking their money in passively managed index funds like the well-known Vanguard 500 Index Fund, which owns slices of 500 of America’s largest corporations. The fund charges 0.17% in fees, which is exactly why most investment professionals aren’t going to steer you toward such product. Money in index funds doesn’t support an army of portfolio managers, analysts and marketers.

And this is where the fiduciary rule the Labor Department is pushing would come in. Instituting a rule that requires advisers serving employee or individual retirement accounts to act purely in the interest of the client would go a long way in moving some of the billions of dollars the industry makes in fees each year back into the retirement accounts of folks who need them most.

With a retirement-savings gap that’s been estimated to be as much as $14 trillion, and Washington fighting over how much we need to cut Social Security, the American retirement system simply can’t afford to support an investment industry that makes billions from deliberately confusing its clients and steering them toward expensive products that shrink retirement accounts over time. The fact that the industry admits that it would have to drop the business of lower-income folks if forced to act in their best interest should tell you all you need to know about the value of its advice.

MORE: 10 Biggest 401(k) Mistakes  —and How to Avoid Them

7 comments
lelford@shaw.ca
lelford@shaw.ca

Thanks Christopher, that was very well done.  And important.  As a recovering broker and financial professional, I work today to eradicate or prevent "financial abuse BY financial professionals".  (or those people who pose as trusted professionals)

It is beginning to work, and I am seeing US and Canadian clients beginning to get their money back.  It just involves, a)  a bit of work and effort and, b) total avoidance of the industry-rigged dispute resolution process.

Here is how the view looks from my end of the scope (the point is made within the first three minutes of this consumer-help video):  

http://www.youtube.com/watch?v=KH6XMXlfdBw&feature=share&list=UUy8dpTRZHEz-0JBa_l0w7AQ

Larry Elford, Alberta Canada

PS. Why is it that every "preventing fraud" presentation put out to seniors is focusing NOT on the greatest area of risk to them, namely fraud and intentional deceit from the very people posing as trusted professionals to those same seniors?

Raggedhand
Raggedhand

...and that's why my husband and I manage our own retirement account. The minute he's allowed to take his 401K contribution and it's match out, we do and then we put it in our own IRA, so there's no penalty. Once that is in our own IRA and Roths we add in some of our own savings and it goes in a wide range of stocks. So far we've averaged over 20% per year, every year for the last 10 years. That includes the market downturn.  That crash terrified us, but we gritted our teeth and kept with the plan. So far so good and my husband is retiring at 57.

If you don't want to be active investors like us, then for goodness sakes buy a good index fund, like the article says. You'll be way ahead.

awenshok
awenshok

Anytime Wall Street and politicians align, you know you're getting screwed.  

ongafrac
ongafrac

lets see, the market takes it's profits just  before sundown friday every  friday since the ethnic twits and greed mongers have dominated the "schlock market"  the so called market has be in the yidisha control . . . . .

G.Gecko
G.Gecko

If the Founding Fathers are watching what elected officials have become Im sure theyre rolling in their graves. Theyve turned what was supposed to be short term PUBLIC service into careers with the ability to vote themselves pay raises set up their own health care system and their own exclusive retirement fund and at the same time trying to make people that paid into SSI their whole lives feel like bums and beggars for expecting the money they were promised by the government . And what they dont tell the American People as they like to call us when they need votes is the reason SSI is in trouble is because they borrowed the money from SSI and DONT want to pay it back now and now theyre against a law that would force the Financial Services Industry to do what is ONLY fair and ETHICAL , to summarize they dont want us to have SSI we paid for and they dont want us to have fair and ethical treatment by an industry that is completely taking advantage of us because we dont have any control over where our money is invested through 401ks. You guys better pray that you wont have to stand before God and explain yourselves

BobJan
BobJan

@G.Gecko  Our elected officials feel that they are completely above those who voted for them. But they love those that give them donations. They kneel at the ATM machines of the lobbying industry. It's pretty pathetic when they are caught with their hand in the cookie jars and they answer with "so, what are you trying to say". They are a pretty pathetic group of individuals. For 535 people that actually do absolutely nothing they are pretty defensive when you question their ability to perform actual work for the people. They are told what to do each and every day what their duties are and how they are to go about it by their donors. SS shortfalls are planned efforts by the mega-wealthy to control how people will be in their retirement years. I know it sounds  very paranoid but when you combine it with their efforts to dissolve unions, keep minimum wages down, eliminate pensions, get rid of employer sponsored health care and other benefits you actually end up with a country that looked much like it did back in the late 1800's and early 1900's.  "OUR" government does not want to do what's in the best interest of the voters. That is very apparent. Scott Walker, governor of Wisconsin, against unions. Unions are not made up of wealthy donors. Michigan passes Right To Work, this is not friendly to the voters. I'm not saying that unions haven't deserved some of the bad press they've gotten over the years. But the people sure aren't represented by their representatives. These people are bought and paid for year after year. I look at Egypt with their burning cities, people being shot and what I see is cities in the US back in the 60's that looked just like that and nobody cared around the globe. Power is a terrible thing when used wrongly and we've got public servants all through the system that need to be voted out the door. "After the votes are counted, the voters don't count". And beside the killing of the unborn they send their young off to die in selfish, mindless wars and conflicts and use Patriotism as an excuse. Only thing is they're not Patriotic at all. They owe their soul to the "Money Person".

littlemo
littlemo

@BobJan @G.Gecko I can't add anything more to what you've said.  It's all true and we are powerless to change it.  Why can't we?  Because all the laws were quietly changed by the 'bought' politicians, starting with Reagan with his friendly smile.  Why isn't corruption and robbery a crime for Wall Street 'kings' of the Universe?  Because it is legally allowable, though totally immoral and unethical.  That's what has happened to the U.S.  Corporations have global control and here we are knowing it all, but unable to do anything.The Corporate State rules.