Kathy Piniewski of Florida learned about financial conflicts of interest the hard way. Piniewski had recently lost her husband to cancer and her job to the Great Recession when she reportedly asked a broker to invest her $200,000 nest egg. She wanted some extra income but needed safety, since the money had to last the rest of her life. Instead, the broker put $50,000 — a quarter of her entire savings — into a risky, illiquid investment: a non-traded real estate investment trust. Much safer alternatives existed — but those alternatives didn’t pay the broker’s firm a whopping 8.5 percent commission.
Such conflicts cost investors more than $17 billion a year, money that would otherwise go toward retirement funds, college educations, home purchases or other goals. Yet the Securities and Exchange Commission appears likely to forego the opportunity to create a uniform fiduciary rule that actually protects us from unethical and costly conflicts of interest.
As it stands, the SEC’s proposed “best interest” rule doesn’t do nearly enough to safeguard investors. Rather than implementing strong protections for those seeking financial advice, the regulatory agency is stepping aside and letting Wall Street continue to reap huge profits at the expense of its customers.
The SEC should listen the the scores of average citizens who participated in the just-ended comment period and urged the agency to ensure that the financial advice they receive is free from conflicts of interest. After all, SEC Commissioner Michael Piwowar has said public comments will be crucial in shaping the agency’s reform of investment advice standards.
Two-thirds of Americans believe that stockbrokers have an ironclad duty, known as a fiduciary obligation, that requires them to put clients’ interests ahead of their own. But nothing could be further from the truth. Most financial professionals are held to a lower “suitability” standard. Stockbrokers can recommend an investment that costs more or performs worse than available alternatives, simply because it pays the brokerage more. Brokers may be swayed by higher commissions to recommend more expensive investments, sales quotas that require them to push certain mutual funds or accounts, and even sales contests promising cash, river cruises and free trips to Bermuda to those who sell the latest promoted product.
The Department of Labor’s fiduciary rule would have raised the bar — at least for retirement savings. The DOL spent years crafting a sound standard requiring stockbrokers and others to put clients’ interests first when giving recommendations about IRAs and other retirement accounts. The rule sparked ferocious opposition from Wall Street and died last month, after the current administration refused to defend it in court.
That left the SEC as Americans’ last hope for protection from predatory financial sales tactics — and it now appears the regulator is about to let us down.
In drafting its proposal, the SEC should have followed its own staff’s recommendation by creating a uniform fiduciary rule for all financial advice. But the current proposal, which was released in April, not only fails to hold brokers to a fiduciary obligation but fails to even define what “best interest” actually means.
Until we have stronger protections, investors must take a defensive stance. People should be wary of any recommendation that they buy products that have notoriously high commissions or costs, such as equity-indexed annuities, proprietary or “house brand” mutual funds, variable annuities inside retirement accounts and non-traded real estate investment trusts.
Most people are far better off in low-cost options, such as index and target date mutual funds with annual expenses below 0.5 percent. Those comfortable with technology should investigate automated investing — or “robo-advisors” — which uses computer algorithms to invest and typically charges an investment management fee of about 0.25 percent.
Investors who want input from human advisers should insist on working only with advisers willing to commit, in writing, to a fiduciary standard, created by a group of consumer-first advisers, known as the Committee for the Fiduciary Standard.
Signing the fiduciary oath doesn’t guarantee an adviser is good, honest or even competent. But advisers who refuse to sign are clearly telling you that they are prioritizing their own interests over yours.
You shouldn’t have to do this, but unless and until the SEC strengthens the best interest rule, you will. At the very least, the SEC should specifically and clearly ban sales contests, sales quotas and differential commissions that pay brokers more to promote one product over another. Even if stockbrokers can’t be expected to put their clients’ interests first, they shouldn’t be incentivized to put those interests last.
Tim Chen is CEO and co-founder of NerdWallet and a former member of the Consumer Financial Protection Bureau’s Consumer Advisory Board as well as a member of the board of the National Foundation for Credit Counseling.
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