We must not allow scare tactics to derail the conflict-of-interest rule

October 20th, 2015 at 6:00 am

[This post was written jointly with Lily Batchelder.]

In objecting to our op-ed on the importance of ensuring that financial advisors place their clients’ best interest ahead of their personal profits, Dirk Kempthorne, the President and CEO of the American Council for Life Insurers, offers a misleading argument, built on a large, incorrectly cited number.

In arguing on behalf of the new conflict-of-interest rule proposed by the Labor Department, we pointed out that the cost of conflicted advice was steep. Independent research finds that when savers receive conflicted advice, their returns on their retirement savings fall by an average of a full percentage point compared to other savers. Over 35 years, that difference can lead to a 25 percent loss in their retirement nest egg. Each year, it is estimated that families lose $17 billion in savings due to conflicted advice.

In response, Kempthorne suggests that the proposal hurt savers by reducing the amount of advice they receive – as if all advice is necessarily good advice – and then incorrectly cites an estimate that actually makes our point, not his. He writes that “by the [Labor] department’s own estimate, financial losses associated with the lack of advice amounted to $114 billion in 2010 alone,” implying the rule will increase these costs.

In fact, the number he cites is DOL’s estimate of savers’ losses from investment mistakes in general, regardless of whether they receive advice or not. It includes mistakes due to getting no advice, mistakes due to getting good advice but not following it, and the very losses that the DOL’s proposal would address – mistakes due to following bad advice from advisers who consciously or unconsciously respond to the structure of perverse incentives that conflicts of interest create.

As we have argued, the proposal would reduce these losses by mitigating many of the harmful effects of conflicts of interest on savers’ returns. Indeed, DOL conservatively estimates that the proposal would save investors $4 billion per year. Moreover, they have signaled that they plan to improve the proposal by incorporating constructive suggestions from many of the stakeholders that Kempthorne mentions.

Kempthorne may have simply misunderstood the number he cited. But unfortunately, it is all too common for lobbyists opposing a proposal to forecast disastrous results while citing numbers in a misleading way. In the interest of retirement security, we mustn’t allow such scare tactics to throw us off track.

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3 comments in reply to "We must not allow scare tactics to derail the conflict-of-interest rule"

  1. Concerned says:

    I only read the headline. I don’t need to be more informed on the subject.

    This should be obvious! Why isn’t this obvious?

    Why wouldn’t every citizen be in favor of this? I think they would be if they knew about it. Unfortunately, they don’t know about it.


    • Paul says:

      The securities industry strongly supports a “best interests rule”. That is not in dispute. However, the industry and financial advisors would like to see the SEC implement the rule so it applies to ALL accounts. If the Dept of Labor goes ahead with the rule it will only apply to retirement accounts, not non-retirement accounts. The SEC has asked the DOL to let them issue a rule that is more encompassing covering all accounts. The securities industry does oppose DOL using the rule to control what investors can invest in with their own money and limiting the options investors have to choose from in regards to compensating their advisors. The DOL rule will make it more costly for younger and smaller investors to get personal service and advice and will dictate what investors can and can’t invest their money in to grow their nest egg. The principle is right, the rule and its overreach is deeply flawed.

    • LarryK says:

      To Concerned, …because most people will not read Jared Bernstein or other unbiased voices of reason. Instead they will believe the TV commercial in which two sheep disguised as a middle class married couple in a car tell them that to their detriment their investment advice will be limited by this legislation.

      Financial advisor conflict of interest is like letting the little league pitcher’s father call balls and strikes.