US President Obama has unveiled new rules for financial advisers requiring them to place their clients’ interests ahead of their own.
In a measure that resembles the Future of Financial Advice (FoFA) best interests duty, Obama said he was “calling on the Department of Labor to update the rules and requirements that retirement advisers put the best interests above their own financial interests”.
“It’s a very simple principle: if you want to give financial advice, you’ve got to put your client’s interests first. You can’t have a conflict of interest,” he said.
“This is especially important for middle-class families who can’t afford to lose even a penny of the hard-eared savings that they’ve put away.”
Fairness and respect
Obama said the new rule did not represent “any special help or special consideration” for families saving for retirement.
“They’re just asking to be treated with fairness and respect,” he said.
“That’s what this new rule would do.”
The White House has published a paper, The effect of conflicted investment advice on retirement savings, which outlines the often devastating impact that conflicts of interest can have on savings plans. It has also established a website to provide consumers with more details.
The paper said it is clear that “conflicted advice leads to lower investment returns”.
“Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return),” it said. “An estimated $US1.7 trillion of IRA [individual retirement account] assets are invested in products that generally provide payments that generate conflicts of interest. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year.”
Level playing field
“For outstanding financial advisers out there, it levels the playing field so they can do what they know is the right thing to do: putting their clients first,” he said.
“Now here’s one last element of it I’ve got to emphasise: just because we put forward a new rule doesn’t mean that it becomes law. There are a lot of financial advisers who support basic safeguards to prevent abuse; but there are also some special interests that are going to fight it with everything they’ve got, saying that these costs will skyrocket, or services are going to be lost.
“But it turns out that we can actually look at the evidence. Industry doomsday predictions have not come true in other countries that have taken even more aggressive action on this issue than we’re proposing.
“And if your business model rests on taking advantage, bilking hardworking Americans out of their retirement money, then you shouldn’t be in business.”
