Overheated coverage of the “Game of Thrones” finale has many news consumers thinking every story they read begins with the warning SPOILER ALERT.
Have no fear here.
In terribly unsurprising news, a new study out of the United Kingdom affirms common sense – that if you aim to close a financial “advice gap” by devastating an accessible, reliable source of information about financial matters, you’re going to make it harder for people to wisely plan and save for the future.
That the study comes from across the pond should not discount its relevance to the United States. Both countries have thousands of baby boomers reaching retirement age daily, and both are debating how best to educate their respective retirement savers on financial planning options.
As reported this month by the Financial Times, a 2013 UK regulatory initiative eliminating commission-based advice has greatly harmed the ability of people of modest means there to obtain the financial education and information they want and need. UK authorities are reconsidering the regulation now.
It’s a familiar story. The U.S. Department of Labor just a few years ago tried implementing a similar regulation, aiming to stamp out commission-based sales arrangements in favor of “fee-based” financial planning. Under these arrangements, a person typically pays annually for help understanding their finances.
There’s nothing wrong with these arrangements. It’s the right way to go for many people interested in an ongoing, long-term relationship with a financial professional. It works for people who can afford to have about 1 percent of their portfolio deducted annually to pay for advice.
But, not everybody thinks of their nest egg as a “portfolio.” Not everybody wants to enter a long-term relationship with a financial professional. Some people want the safety and security that comes with working closely with their commission-based, Main Street financial professional. They may just want education and information about retirement planning from their financial pro, or to take a portion of their IRA or 401(k) and simply buy a financial product like an annuity and start receiving lifetime income.
They shouldn’t be denied this choice. According to the research group LIMRA, if the Labor Department’s regulation had remained in force, 54 percent of advisors might have dropped or turned away small investors, resulting in an advice gap of as many as 4 million middle class households losing access to information they need to ensure a secure retirement.
Wisely, a federal appellate court overturned the regulation, as the Labor Department waded into waters outside its regulatory authority. So now, the right federal agency – the Securities and Exchange Commission (SEC) – is taking the lead on the issue.
In June, the SEC is expected to issue a final rule balancing the need for increased consumer protections in the sales process and maintaining retirement-saver access to the wide range of financial professionals, including those who work on a commission basis. At the same time, the National Association of Insurance Commissioners (NAIC) also is deeply involved.
Representing insurance commissioners from throughout the country who regulate many of the financial pros serving Americans of modest means, the NAIC is expected later this year to update its model legislation on annuity sales.
The tea-leaf readers predict the NAIC efforts will parallel the SEC efforts, making sure consumers have all the information they need about their financial pros and how they get paid, which was a goal of the vacated Labor Department regulation. And the Labor Department, staffed by a new team of leaders, just announced plans to return to the issue, but likely with a more reasonable and narrow perspective of its authority over the issue. A key difference between the vacated and the upcoming proposals is that unlike the UK, America will not exacerbate its “advice gap” due to a bad regulation.
Both the SEC and NAIC seem to recognize that consumers will pay a high price by regulations that destroy an entire community in pursuit of a lofty goal. Sorry if that’s a spoiler.
Jack Dolan is Vice President, Public Affairs for the American Council of Life Insurers
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