Republicans and some Democrats defend financial advice that’s not worth getting
What if the next time you went for a medical checkup, you were accosted by a pharmaceutical rep waiting for her expense-account lunch with the doctor. But instead of saving her pitch for the doctor—a sleazy enough practice—the drug rep began telling everyone in the room that they should take an expensive drug that has no advantage over a generic version and is approved only for medical conditions no one there has.
Illegal? Yes. But imagine that this was actually legal and that President Obama, with the support of progressives in his party, had issued a proposed rule intended to curb such practices by requiring that anyone offering advice to patients in a doctor’s office have the patient’s best interest at heart.
Here’s what would happen: Republicans in Congress would start parroting industry talking points about this having a chilling effect on urgently-needed advice people are receiving for free and can’t afford to pay for. A substantial minority of congressional Democrats would claim to agree with the president in principle, but find one reason or another to delay the rule indefinitely with quibbles and questions. The industry lobby would continue to shower Republicans with campaign donations, while the hand-wringing Democrats would avoid being singled out by the industry in their quest for reelection. Pundits would treat it as a complicated issue where there is serious risk of unintended consequences, and Americans would continue to be suckered into paying exorbitant prices for risky products they shouldn’t be buying in the first place.
How do we know this? Because this is what happened when the president issued a proposed rule requiring all financial advisors to have a fiduciary responsibility to the people they’re advising. This is a no-brainer, even if it’s only a small step toward addressing conflicts of interest in retirement saving. Specifically, Secretary of Labor Thomas Perez and Assistant Secretary Phyllis Borzi hope to curb the practice of inducing people to roll over 401(k) funds into high-cost IRAs, a practice that the president’s Council of Economic Advisors (CEA) estimated costs Americans $17 billion a year. The CEA estimates that a retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years.
The rule doesn’t address the fundamental problem that most 401(k) plans themselves offer many high-cost and inappropriate investment products to participants, who should be investing in low-cost index funds instead of actively-managed funds. Current fiduciary standards are too weak to ensure that employers—who, like doctors, already have a duty of care, but in practice face conflicts of interest—actually exercise this duty effectively. But the standards are better than nothing. And if this modest measure is blocked or indefinitely delayed, it will embolden the financial industry to commit even worse abuses.
Fortunately, the president and Democratic leaders are holding fast, signaling that any attempt to block the rule by attaching a rider to must-pass budget legislation will be treated as a poison pill. But all political actors—good and bad—need to know that people are paying attention to their stance on this financial disservice. It’s important to keep in mind that retirement saving, like medical care, is heavily subsidized by taxpayers. These are also areas where people seek professional advice precisely because they have no training that would allow them to easily recognize that what they’re being sold is snake oil. Even if you’re inclined to believe that markets work best when entrepreneurs are given wide latitude to promote their products, there are reasons to hold certain professions, including medical providers and financial advisors, to a higher standard of care.