Obama Administration Wants to Regulate the Advice We Get From Retirement Planners
Norbert Michel /
Now, it appears the Obama administration wants to control the advice we can get from retirement planners.
The administration announced it is moving ahead with a new Department of Labor rule designed to provide uniform fiduciary rules for anyone providing retirement investment advice.
In general, a fiduciary standard requires financial advisers to put their individual client’s interests above their own. Although, this idea seems simple, there is a real danger to imposing a one-size-fits-all approach on an extremely diverse set of financial advisers.
There are several sets of rules that govern what investment advisers can do, and that makes some sense because there are different types of advisers. For instance, pension plan trustees have a fiduciary duty because it’s their job to protect the plan beneficiaries’ interest, but stockbrokers generally don’t have a fiduciary duty because it’s their job to sell stocks.
It may sound nice that the rules for all investment advisers should be uniform, but it’s not at all clear forcing this standardization on the industry is necessary. And doing so could create a false sense of security for investors.
A much better approach would be to implement a uniform federal disclosure statement, and federal regulators should consider the New York City Comptroller proposal as a possible model. The comptroller’s proposal would require all financial advisors not currently operating under a fiduciary standard to state, at the beginning of their advisor-client relationship, the following:
I am not a fiduciary. Therefore, I am not required to act in your best interests and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks and expected returns for you.
Advisors also would be required to maintain records showing the client acknowledged this disclosure was provided.
So, for example, mutual fund company representatives simply would use this statement to acknowledge they are working for the mutual fund company and not the investor.
An excellent case can be made for imposing this type of uniform federal rule because U.S capital markets—by their very nature—are a form of interstate commerce. A uniform federal disclosure rule of this nature would be less costly overall for consumers, whereas mandating a specific fiduciary standard most likely would increase consumer costs.
Furthermore, imposing a one-size-fits-all standard on all types of advisors will lead to more opportunity for regulatory capture (meaning the government ends up helping the very industry it’s supposedly regulating) and cronyism, and ultimately move markets away from the type of innovation that can help diversify risks.
Regardless, it’s not the government’s job to protect people from every possible conflict of interest that might arise in the economy. Government’s legitimate role is to focus on prosecuting fraud and protecting property rights.
Rules and regulations that go beyond this basic principal of limited government go too far, but a disclosure requirement would be more closely aligned with good principles of limited government.