Last week, New York City Comptroller Scott Stringer unveiled a new plan to regulate financial advisers, the first of its kind, that tries to protect the average investor from advisers who don’t have to put their clients’ best interests first.
Currently, the regulations that apply to financial advisers have a carve out for broker-dealers who can give financial advice but don’t have to act as what is called a fiduciary. What that means in practice is that they can recommend investment products to their clients that serve to make them more money but aren’t necessarily the best or right option for their clients. A recent White House report estimates that this conflicted advice costs workers who invest their savings about $17 billion each year.
Stringer has proposed that New York State pass legislation that would require financial advisers to disclose whether or not they are fiduciaries and whether or not they have to put a client’s interests ahead of their own. Brokers, financial planners, and retirement advisors who don’t follow the fiduciary standard, which means put their clients’ interests first, would have to state at the outset: “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.”
“Like putting a warning label of a package of cigarettes, this would be a warning label for people who want to protect their life savings,” Stringer told ThinkProgress. “If you’re working for a company that’s about the company’s product and not about your client, we want you to own up to that.” The rule, he pointed out, wouldn’t say that these advisers can dole out advice to those who want it, but that they have to clarify the standard they follow.
The rule would be somewhat of a stopgap while those in favor of tighter regulation for these financial advisers await federal changes. The Obama administration recently announced its support for the Department of Labor’s (DOL) efforts to broaden the fiduciary standard so that all advisers would be held to it and have to put clients’ interests ahead of their own. That would negate the need for Stringer’s proposed rule. “If everybody’s a fiduciary, then it’s no longer really an issue,” said Barbara Roper, director of investor protection at the Consumer Federation of America.
But the industry is fighting vocally against the rule and it may take a long time to come to fruition, if at all. “I can’t imagine the DOL proposal, even if it moves as quickly as possible, being in effect before 2017,” said Robert Hiltonsmith, senior policy analyst at the think tank Demos. Financial industry group representatives did not respond to a request for comment.
“There is great momentum at the federal level to implement the fiduciary standard, but there’s no guarantee that it will pass or pass in this administration,” Stringer himself noted. “With a lot at stake, I don’t want to wait for Washington to act. I think states have to act to protect investors.”
States can’t have a stronger fiduciary standard than the federal regulations. But they do have the authority to regulate disclosure. Stringer’s proposal, while not as strong as the federal one, could have an impact. “The disclosure they’ve proposed is pretty stark, which improves the chances that it would be effective,” Roper said. “At least it’s not a bunch of legalese.” The average investor, usually someone seeking out advice for retirement planning, should be able to understand the warning label that Stringer has laid out.
That clear language could steer people away from investors who may not serve their needs. “This might make them think…maybe I should go ask someone else,” Hiltonsmith said. “It could actually change the market a little bit and drive people toward fiduciary advisers.”
The effect may also carry beyond giving investors a warning. “You can get out from under it if you are subject to a fiduciary duty by law, by professional standard, or by policy,” Roper pointed out. Those who don’t want to have to state the disclosure up front could simply become certified as a fiduciary or adopt another policy requiring them to adhere to the standard. “Sometimes people will improve their conduct in order to be able to avoid having to provide disclosure.”
Stringer says he put forward the proposal out of an interest in protecting people’s golden years. “As fiduciary of a pension fund, my real job is to protect retirement security for 700,000 retirees,” he said. “I don’t have to just do it through the pension fund.” Today, most retirees don’t get pensions; instead, if they’re lucky, they have 401(k) plans where employers contribute a set amount and the payout is up to the workers’ investment choices. But about a third of working-age people have less than $1,000 in their savings and retirement accounts and there is a $6.6 trillion gap between what Americans need for retirement and what they have actually saved up. So losing money to unnecessary fees “can be the difference between retiring in a comfortable way or having to get a second job,” Stringer said. “A lot is at stake for people.”
Stringer himself doesn’t have the power to make his proposal law, but he said he’s in the process of getting sponsors for it among the state’s legislators. They’ll be focused on hashing out New York’s budget until April 1, but he expects a “robust” legislative session to begin after that. “We’ll have sponsors on this legislation in a matter of days, then we’ll go to [the state capitol] Albany and get this passed.” He noted he’s gotten much more of a response than he had previously expected.
And while New York is the first state to consider this approach, it could get adopted elsewhere. “I do think this will spread to other states,” Stringer said.
Hiltonsmith noted that retirement security has become an increasing concern for state lawmakers. “A few years ago, none of our public officials were talking about the retirement crisis,” he said. But as the issue has gained traction, “I do think states have been thinking about it more and more.” The past few years have seen an uptick in legislation around the issue, he said, such as ways to reform or replace the 401(k) system. This new idea may also take off.