Last week, the Securities and Exchange Commission (SEC) adopted Regulation Best Interest, sold as a measure to protect everyday Americans’ retirement accounts from shady brokers. In reality, it’s a watered-down reboot of the Obama administration’s fiduciary rule, which was axed in 2017. The original fiduciary rule set concrete requirements to make sure retirement advisers put their clients ahead of their own profits and disclosed key information about how they were getting paid. The new rule pays lip service to the client’s best interest without any of those details.
Amazingly, retirement brokers have not been required to act in their clients’ best interest, a gaping hole in the regulatory framework the Obama admin sought to remedy. By contrast, every CEO’s contract includes a fiduciary duty binding them to act in their corporation’s best interest, and exposing them to legal liability if they don’t. In other words, corporate CEOs face stronger accountability standards than the brokers responsible for ordinary Americans’ retirement funds.
Retirement accounts like 401(k)s and IRAs, along with personal savings and Social Security, make up the “three-legged” stool Americans have historically relied on upon retiring. Americans set aside a portion of their wages into retirement accounts for their entire working lives. By the time they cash in, the majority of the money in that account is interest, since the account has accrued for so long. In light of this, it’s incredibly important that the financial professionals responsible for building that interest are doing so in a way that puts clients first.
In reality, the existing requirement for retirement brokers is an astonishingly low “suitability” standard, whereby brokers can direct clients to options that aren’t ideal or that they personally profit from, as long as the investment is in the ballpark of the client’s needs. Additionally, retirement brokers have not been required to disclose conflicts of interest or compensation structures, giving rise to a patchwork landscape of industry kickbacks and hidden fees.
There are real consequences to this lax regulatory framework: American lose about $17 billion every year in potential retirement savings to compromised financial advice. In an economic system that is already tilting more and more in favor of the wealthy over the working class, this is another slap in the face for Americans leaving working life.
The original fiduciary rule would have subjected retirement brokers to a fiduciary standard, compelling them to prioritize their clients’ best interest, disclose conflicts of interests along with their own fee and compensation structure, and avoid allowing outside interests to influence their decision-making. On the other hand, Regulation Best Interest articulates to the best interest standard without the disclosure requirements that give it teeth and make it enforceable. At best, it’s posturing, and at worst, it helps lock in the status quo.
Opponents of the fiduciary rule contend that brokers in the industry would have to restructure their products and compensation structures, making it more expensive, or even impossible, for investors to access investment advice. But while this is argued as a reason not to adopt the rule, it’s tantamount to an admission that the industry as it stands is not geared toward the client’s best interest. Their argument boils down to “how are we supposed to help people if we’re not allowed to rip them off?”
But appeasing powerful interests doesn’t make them back down, it emboldens them. If anything, this line of argument underscores the need for a full fiduciary standard. It’s more obvious than ever that we can’t trust corporations and financial institutions to police themselves, and it’s time to regulate them in earnest.