Conflicted Investment Advice Costs Families $17 Billion A Year

A recent op-ed in the New York Times revealed that conflicted advice from financial advisors to investors causes approximately $17 billion in losses to American families every year. The authors, professor Lily Batchelder and economist Jared Bernstein, strongly advocate a rule that all financial advisors servicing retirement accounts be required to put their clients’ interests ahead of their own.

The Department of Labor is currently working toward implementation of this rule, which would prevent brokers from “nudging their clients into investment products that pay the advisors more for their recommendation, but offer less return for the investors.” In legal terms, the proposed rule would enforce a “fiduciary standard” on these financial advisors, meaning they “have to put their customers’ best interest before their own profits.”

Most people—75% by some estimates—believe that their financial advisors already have this obligation. But it’s not true. In fact, the financial services industry has already spent tens of millions of dollars trying to block this rule. These industry lobbying efforts beg the question: what is it exactly that the industry is so afraid of? The lobbyists say that the rule would make it more expensive for investment advisors to operate and could even make it impossible for middle- or low-income people to afford their advice. But as the authors write, more advice does not necessarily equal good advice: “By that logic, sending Bernard L. Madoff to jail was bad for middle-class savers because they had fewer advisors to pick among.”

In real-dollar terms, think of this example: A financial advisor, because of a higher commission coming to him or her, recommends that a client purchase an investment product that has a one-percent lower annual return than another product that would offer less revenue for the advisor. Over a 35-year retirement savings period, that original conflicted recommendation would result in a nest egg 25% smaller than it could have been. That is a huge difference, and one that could be avoided if a fiduciary standard were enforced.

The bulk of financial advisors want what is best for their clients. Sometimes, though, the compensation arrangements within their firms make it very hard to provide truly objective advice that elevates the customers’ interests above all else. That inherent conflict is exactly the reason why the fiduciary standard is an idea whose time has come. In fact, it is long overdue.

In the coming days and weeks, stay tuned as Congress, the Department of Labor, industry lobbyists and investor advocates battle over this crucial issue. The safety of your retirement savings just may depend on the outcome.If you have suffered an investment loss and are concerned that it may have been caused by conflicted advice from your financial advisor, please contact a securities attorney at The Galbraith Law Firm. Call 212.203.1249 or email kevin@galbraithlawfirm.com for a free confidential consultation regarding your legal rights.