Memo to Congress: Americans Want Financial Advice in Their Best Interest

After House Votes to Stop New Rule Requiring Such Advice, AARP Survey Shows Over 9 in 10 Want Trustworthy Advice on Retirement Savings

WASHINGTON, May 13 2016 /PRNewswire-USNewswire/ — Today AARP released survey results that show 9 in 10 Americans agree with the recently announced US Department of Labor (DOL) rule that will require professional retirement plan advice to be in a client’s best interest.

The survey comes as the US House of Representatives voted at the end of April to stop protections for retirement investors that require best interest advice. The rule, finalized at the beginning of April, is expected to save middle-class families billions of dollars per year.

“Americans have been losing billions of dollars every year receiving retirement savings advice from financial advisors not committed to giving recommendations in their clients’ own best interest,” said AARP Executive Vice President Nancy LeaMond. “It’s telling that while all seem to publicly agree with this standard, many still want to stop this rule from going in to effect next year.

What they think:

Of the current or past retirement savings account holders surveyed:

• 88% believe it important that professional financial advisors give advice in the best interest of their clients. This includes an overwhelming majority of those who have (92%) and have not (79%) received financial advice.
• 91% agree with the DOL rule that requires professional financial advice to be in a client’s best interest.
• 80% have received professional financial advice in the past or expect to receive such advice in the future.
• Across income levels, large majorities of consumers have received or expect to receive financial advice including:
• 91% of those with annual household incomes of $75,000 or more
• 78% of those with annual household incomes of $50,000 to $74,999
• 72% of those with annual household incomes of $25,000 to $49,999
• 66% of those with annual household incomes of less than $25,000

Excerpts from the DOL Fact Sheet addressing ‘conflicts of interest in retirement advice’

• Summary
  Since 1974, when Congress enacted the Employee Retirement Income Security Act (ERISA), the Department of Labor (‘DOL’ or ‘Department’) has worked to protect America’s tax-preferred retirement savings. In the ensuing decades, there has been a dramatic shift in the retirement savings marketplace from employer-sponsored defined benefit plans to participant-directed 401(k) plans, coupled with the widespread growth in assets in Individual Retirement Accounts and Annuities (IRAs). When the basic rules governing retirement investment advice were created in 1975, 401(k) plans did not exist and IRAs had just been authorized. These rules have not been meaningfully changed since 1975. 

  The changes in the retirement landscape over the last 40 years have increased the importance of sound investment advice for workers and their families. While many advisers do act in their customers’ best interest, not everyone is legally obligated to do so. Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products. These conflicts of interest do not always have to be disclosed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors. These harms include the loss of billions of dollars a year for retirement investors in the form of eroded plan and IRA investment results, often after rollovers out of ERISA-protected plans and into IRAs. 

  The Department’s conflict of interest final rule and related exemptions will protect investors by requiring all who provide retirement investment advice to plans and IRAs to abide by a “fiduciary” standard—putting their clients’ best interest before their own profits. This final rulemaking fulfills the Department’s mission to protect, educate, and empower retirement investors as they face important choices in saving for retirement in their IRAs and employee benefit plans.

• Background
  Beginning in 2009, the Department of Labor undertook a multi-year regulatory project to address the problems with conflicts of interest in investment advice, balancing the need to better protect retirement savings while minimizing disruptions to the many good practices and good advice that the industry provides today. 

  From the outset, the project involved significant input from interested stakeholders, including two separate proposals published for public comment in 2010 and 2015. The Department held multi-day public hearings on the 2010 and 2015 proposals, hundreds of individual meetings with a wide range of stakeholders, and published the public comments and hearing transcripts on the DOL website. Thousands of comments and petitions came from consumer groups, plan sponsors, financial services companies, academics, elected government officials, trade and industry associations, and others, both in support of and in opposition to the proposals. 

  After careful consideration of the issues raised by the written comments, hearing testimony, and the extensive public record, the Department is adopting a final rule and related final exemptions. The final rule defines who is a fiduciary investment adviser, while accompanying prohibited transaction class exemptions allow certain broker-dealers, insurance agents and others that act as investment advice fiduciaries to continue to receive a variety of common forms of compensation as long as they are willing to adhere to standards aimed at ensuring that their advice is impartial and in the best interest of their customers. The rulemaking package also includes a regulatory impact analysis which demonstrates the monetary harm caused to retirement investors from conflicted advice and the gains that will result from the rule.

  It's telling that while all seem to publicly agree with this standard, many still want to stop this rule from going in to effect next year
   

  Going forward, those that provide investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries and IRAs and IRA owners must either avoid payments that create conflicts of interest or comply with the protective terms of an exemption issued by the Department. Under new exemptions adopted with the rule, firms will be obligated to acknowledge their status and the status of their individual advisers as “fiduciaries.” Firms and advisers will be required to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer; charge only reasonable compensation; and make no misrepresentations to their customers regarding recommended investments. Together, the rule and exemptions impose basic standards of professional conduct that are intended to address an annual loss of billions of dollars to ordinary retirement investors as a result of conflicted advice. 

  For more details about changes made from the 2015 proposed regulatory package to the final rule and exemptions, refer to the “Chart Illustrating Changes from Department of Labor’s 2015 Conflict of Interest Proposal to Final.”

• What Is Covered Investment Advice Under the Rule?
  The rule describes the kinds of communications that would constitute investment advice and then describes the types of relationships in which those communications would give rise to fiduciary investment advice responsibilities. 

  Covered investment advice is defined as a recommendation to a plan, plan fiduciary, plan participant and beneficiary and IRA owner for a fee or other compensation, direct or indirect, as to the advisability of buying, holding, selling or exchanging securities or other investment property, including recommendations as to the investment of securities or other property after the securities or other property are rolled over or distributed from a plan or IRA. 

  Covered investment advice also includes recommendations as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, selection of investment account arrangements (e.g., brokerage versus advisory); or recommendations with respect to rollovers, transfers, or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer, or distribution should be made. 

  Under the final rule, the fundamental threshold element in establishing the existence of fiduciary investment advice is whether a “recommendation” occurred. A “recommendation” is a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action. The more individually tailored the communication is to a specific advice recipient or recipients, the more likely the communication will be viewed as a recommendation. The Department has taken an approach to defining “recommendation” that is consistent with and based upon the approach taken by the Financial Industry Regulatory Authority (FINRA), the independent regulatory authority of the broker-dealer industry, subject to the oversight of the Securities and Exchange Commission (SEC). 

  The types of relationships that must exist for such recommendations to give rise to fiduciary investment advice responsibilities include recommendations made either directly or indirectly (e.g. through or together with any affiliate) by a person who: 

  – Represents or acknowledges that they are acting as a fiduciary within the meaning of ERISA or the Internal Revenue Code (Code); 

  – Renders advice pursuant to a written or verbal agreement, arrangement or understanding that the advice is based on the particular investment needs of the advice recipient; or 

  – Directs the advice to a specific recipient or recipients regarding the advisability of a particular investment or management decision with respect to securities or other investment property of the plan or IRA. 

  The recommendation must be provided in exchange for a “fee or other compensation.” “Fee or other compensation, direct or indirect” means any explicit fee or compensation for the advice received by the person (or by an affiliate) from any source, and any other fee or compensation received from any source in connection with or as a result of the recommended purchase or sale of a security or the provision of investment advice services including, though not limited to, such things as commissions, loads, finder’s fees, and revenue sharing payments. A fee or compensation is paid “in connection with or as a result of” such transaction or service if the fee or compensation would not have been paid but for the transaction or service or if eligibility for or the amount of the fee or compensation is based in whole or in part on the transaction or service.

Read the entire report here.

Methodology

This survey was conducted for AARP via telephone by SSRS, an independent research company. Interviews were completed from April 8 through April 17, 2016 among a nationally representative sample of 1,007 adults ages 25 and older who currently have–or who have had in the past—a retirement savings account. Respondents were reached on landlines and cell phones, with 60% of the interviews completed on cell phones and the remaining 40% on landlines. The margin of error among all 1,007 respondents is +/- 3.7% at the 95% confidence level.

For more AARP resources and information on the impact of legislation that would seek to destroy advice in the best interest of Americans trying to save for retirement, full survey results may be found here.

About AARP
AARP is a nonprofit, nonpartisan organization, with a membership of nearly 38 million that helps people turn their goals and dreams into ‘Real Possibilities’ by changing the way America defines aging. With staffed offices in all 50 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, AARP works to strengthen communities and promote the issues that matter most to families such as healthcare security, financial security and personal fulfillment. AARP also advocates for individuals in the marketplace by selecting products and services of high quality and value to carry the AARP name. As a trusted source for news and information, AARP produces the world’s largest circulation magazine, AARP The Magazine and AARP Bulletin. AARP does not endorse candidates for public office or make contributions to political campaigns or candidates. To learn more, visit www.aarp.org or follow @aarp and our CEO @JoAnn_Jenkins on Twitter.