Who advises you about your retirement account? And more importantly how is he or she being compensated and by whom?
On Monday, while representing Main Street Alliance, I found myself in the same room with President Obama and the Secretary of Labor Thomas Perez, as they unveiled some new rules that coming for those who sell retirement investment plans such as annuities, IRAs and 401ks.
We see the ads for financial advisors everywhere telling us to follow the brightly colored path, the tumbling blocks or the whales into financial security in retirement.
When you finally choose one, you could be getting sound advice and dealing with reputable brokers who put your interest first. However, it’s just as possible that your retirement financial advisor might not be working in your best interest – and it could cost you. High sales commissions, luxury perks and other incentives from high load, low yield funds to brokers – along with the cost of those big ad budgets, could be coming out of your pocket in the form of high percentage management charges and hidden fees.
My grandfather was a rail executive and it just so happens I traveled by train from Newark, New Jersey to Washington, D.C. on Monday. Standing on the dingy platform at Newark’s Penn Station, I realized it was all brand new when my grandfather’s star was rising at American Locomotive.
It had been an efficient modern system of mass transportation 100 years ago. Today, the station, tracks, even the train I rode on, are relics of the steam age. Like this country’s decrepit rail system the rules governing retirement investment brokers are decades late and billions short.
According to an analysis done by the White House Council of Economic Advisors, because of conflicts of interest, IRA investors lose between $8 billion and $17 billion in underperformance every year nationwide.
According to Secretary Perez, retirement advisers, who we trust to provide critical financial advice every day, are not obligated to look out for our best interests.
“As a result, they can steer you toward high-cost, low-return investments instead of recommending quality ones, because it means back-door payments for them … it could cost you tens of thousands of dollars over your lifetime,” said Perez.
Under the President’s direction, the Labor Department will publish a rule in the coming weeks that will require retirement advisers to put the best interests of their clients above their own financial interests.
As a small businessman I am all for this proposal. I don’t have a big firm with our own in-house financial management team that can advise me on this. I want the financial advisors I work with to be required to represent my interests.
But the brokerage industry and the U.S. Chamber of Commerce are holding true to their mission of making it as easy as possible for the financial industry to syphon money out of the economy with a minimum of effort rather than to invest in and build America.
They are making arguments against the President’s proposal that are as old and run down as that train platform in Newark – they say small accounts will suffer, that they are already heavily regulated and that the market will take care of things. Don’t buy it.
As the Department of Labor has made clear, the brokerage firms will still get their commissions, they will just have to earn them on your behalf. Commercial IRA’s will still be available if you are determined to spend a lot of money on fees.
Let’s adopt this rule. Small investors will still be able to get what they need, but they also will be more confident that what they are being offered is in their best interest. You can read all the details on the White House Blog.