Safeguarding Our Savings
EXECUTIVE SUMMARY
For generations, Americans have taken their hard-earned money to financial advisers to save for retirement, build a nest egg, and invest their life savings. Most have assumed that these investment professionals provide unbiased recommendations in their client-investor’s best interest.
Unfortunately, for far too long, individual investors have been left in the dark about the true loyalties of many financial advisers. In short, outdated laws, regulations, and legal loopholes have made it hard for Americans to know whether advisers are following the highest investment standard—known as the fiduciary duty—in making their recommendations.
The fiduciary duty is a legal promise that all investment advice must always be in the consumer’s best interest. It obligates advisers to disclose and avoid all conflicts of interests, recommend bestvalue investment options, provide objective analysis and investment advice, and, above all, put the client’s interests before their own.
This report, from New York City Comptroller Scott M. Stringer, outlines the history and importance of the fiduciary duty and recommends immediate and concerted action by federal regulators and New York State legislators to broaden awareness of the fiduciary duty and ensure that any conflicts of interest are clearly disclosed to clients before they enter into a financial relationship with advisers.
As it is, much of America’s savings are entrusted to money managers, financial advisers, and brokers governed by a more lax “suitability standard.” Under this standard, advisers are allowed to guide clients towards investments carrying higher fees and expenses or “in-house” investments that may generate commissions and higher revenues for the firm, provided those investments are “suitable” to the client’s stated investment objectives, means, and age.
Simply put, a suitability standard allows, and indeed frequently requires, a broker to put his or his firm’s interests ahead of the client’s interests.
This costs investors billions. A recent report issued by the President’s Council on Economic Advisers conservatively estimates that such conflicted advice leads to lower investment returns— approximately 1 percentage point lower each year. That may not seem like much, but it adds up over time. In fact, over a lifetime, losing 1 percent of returns annually could reduce a family’s savings by more than a quarter. 1 Collectively, it adds up to $17 billion in lost returns every year in Americans’ Individual Retirement Accounts (IRA) alone.
Last month, President Obama directed the Department of Labor (DOL) to issue a new rule that would require all retirement advisers to adhere to the fiduciary standard. The Comptroller fully supports the President’s DOL proposal, which will have an enormous effect on safeguarding American’s retirement savings.
The Securities and Exchange Commission (SEC) must work in concert with the DOL to apply the fiduciary standard to all personalized investment advice tendered by so-called advisers. This will ensure that all non-retirement holdings in stocks, mutual funds, and bonds are protected by the highest ethical standard of care so that when individual investors seek out a “financial adviser” or a “financial planner,” a “retirement specialist” or a “broker-dealer,” they can rest assured knowing that the investment professional is duty-bound to offer objective advice that is in their best interest.
There is some evidence that the SEC is considering action. Recently, SEC Chair Mary Jo White indicated her personal support for reform, stating that she believes the SEC “has an obligation” to issue a rule on the fiduciary standard.3 It is critical that Chair White’s leadership moves the SEC to issue a robust rule which applies the historic strength of the fiduciary duty across the full range of 21st century financial products and services.
While there is no substitute for federal regulatory reform, we cannot wait for Washington to act— not while millions of New Yorkers remain unaware about the standards governing the retirement and savings advice they receive. In fact, surveys show that deceptive advertising practices and industry obfuscation have led to over three-quarters of investors mistakenly believing that that all financial advisers are held to a fiduciary duty.
As a result, New York should pass a state law requiring all financial advisers (including, but not limited to, broker-dealers, traders, and financial planners) to disclose—in plain language, not in fine print—whether they abide by the fiduciary standard, so that prospective clients know of potential conflicts of interest and to what party the advisers hold their ultimate allegiance.
While this law would not prevent financial advisers from operating under the weaker suitability standard, it would ensure that individual investors have the information they need to determine the motivations of their investment professional and chart the best course of action for their families.
By updating rules and regulations to better reflect the momentous changes that have taken place in the financial industry over the past half-century, we will promote the transparency and accountability that has made New York City the Financial Capital of the World, while ensuring that all Americans are empowered to make smart decisions about their financial futures.