Do Financial Advisers Work for You or Wall Street?

Did Wall Street win on Election Day? The U.S. Department of Labor's watchdog agency charged with protecting pension and retirement savings is on the verge of issuing new worker and retiree protections.
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Co-authored with Richard Fiesta, executive director of the Alliance for Retired Americans

Did Wall Street win on Election Day? The balance in your retirement savings account may soon tell the story. Here's why:

The U.S. Department of Labor's watchdog agency charged with protecting pension and retirement savings is on the verge of issuing new worker and retiree protections. These changes likely will require that professional investment advice about all forms of retirement money, whether in a 401(k) account, an individual retirement account (IRA) or a pension plan, is solely in the client's best interest and not distorted by how and what the adviser is paid. Workers and retirees will not get these long overdue protections, however, if Wall Street and Congress get in the way.

Right now, retirement rules make it perfectly legal for some professionals providing investment advice on retirement savings to put their own financial interests first by promoting investments that earn them hefty commissions. Many Wall Street firms take advantage of outdated rules by paying financial advisers in ways that deliberately pit an adviser's paycheck against retirement investors' best interests. In some cases, an adviser can earn double or triple in pay by advising an investor to pick one option over another.

Do high costs really impact your retirement in a big way? You bet. Like a colony of termites, unwarranted high costs can hollow out your hope for a decent retirement. Here's an example from the Labor Department: If a worker with $25,000 in an IRA pays annual fees and expenses of 0.5 percent for 35 years until retirement, the account could grow to $227,000 at retirement, assuming decent investment returns. If, instead, the annual fees and expenses on that very same account are 1.5 percent, the account would grow to only $163,000. Wall Street would take $28 in fees out of every $100 in potential retirement money!

How, then, can this be allowed? The existing rules for retirement investment advice were written nearly 40 years ago when there were no 401(k) plans and almost no one had money in an IRA. Since then, through intense lobbying of federal regulators and members of Congress, Wall Street has managed to bottle up any efforts to change the rules to protect individual retirement plan investors.

The good news is that the Labor Department is working on modernizing the rules. After conducting a thorough economic analysis and careful deliberation, it soon will propose a new rule to close the loopholes that now exist for these self-dealing practices by financial professionals. This new rule will mean that individual investment advice will no longer be a tool to fatten Wall Street's bottom line at workers' expense. Done right, this rule will put us all farther down the road to a decent, financially secure retirement.

But even if it's done right, the updated rules are not a sure thing. The protections will become final only after an opportunity for public comment -- and only if Congress does not get in the way. Back in 2013, after Wall Street firms invested big money in a lobbying campaign, the U.S. House of Representatives voted to block the Department of Labor. But the U.S. Senate did not go along. If the new Congress, with the change in Senate control going to the Republicans, torpedoes these investor protections, then we'll know that Wall Street was the true winner in the 2014 elections.

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