New fiduciary standards for US retirement planning advisers could save investors more than US$400 billion over the next 20 years, according to the US Department of Labor (DOL).
The DOL paper announcing the new fiduciary standard on April 8 says the US retirement advice market suffered from a consistent “substantial failure”.
“… IRA [investment retirement account] holders receiving conflicted investment advice can expect their investments to underperform by an average of 50 to 100 basis points per year over the next 20 years,” the DOL report says. “The underperformance associated with conflicts of interest—in the mutual funds segment alone—could cost IRA investors between $95 billion and $189 billion over the next 10 years and between $202 billion and $404 billion over the next 20 years.”
Under the rules, due to take effect next April, US financial advisers looking after IRA and the workplace-based 401(k) savings accounts must act in the best interests of their clients. Previously, advisers only had to recommend ‘suitable investments’ for retirement savings clients, which the DOL says led to large-scale sales of expensive products linked to in-house or highly-incentivised funds.
However, the new advisory rules – which only apply to US retirement accounts – stop short of banning commissions or other sales-based revenue-sharing arrangements. Those potentially-conflicted remuneration methods would still be permitted as long as the adviser recommendation meets the ‘best interests’ standard, the charge is ‘reasonable’, and any conflicts of interest are disclosed.
The DOL paper also dismisses criticisms that tougher fiduciary standards would increase costs while preventing smaller investors from gaining access to retirement investment advice.
According to the DOL report, evidence from the UK suggests gaps in the advice market there were not caused by investment adviser reforms introduced there in 2012.
Comments based on the assumption that fiduciary rules would reduce access to advice “therefore are of limited relevance to this analysis”, the DOL says.
“In light of the Department’s analysis, its careful consideration of the comments, and responsive revisions made to the 2015 Proposal, the Department stands by its analysis and conclusions that adviser conflicts are inflicting large, avoidable losses on retirement investors, that appropriate, strong reforms are necessary, and that compliance with this final rule and exemptions can be expected to deliver large net gains to retirement investors,” the paper says.
“The Department does not anticipate the substantial, long-term unintended consequences predicted in the negative comments.”