Financial advisers long have been required to avoid conflicts of interest and act as “fiduciaries,” meaning they must act first and foremost in the best interest of their clients.
But a new investigation by the office of Sen. Elizabeth Warren (D-Mass.) found “a deeply troubling pattern of secretive incentives and rewards” for advisers, including expensive getaways in the Caribbean, luxury cruises on the Danube River and large cash bonuses among dozens of companies that provide such advice.
In the report, first shared with The Hill, Warren argues such incentives muddy fiduciary duty, raising questions about whether advisers are acting in a client’s best interest or their own.
“Americans who work hard and save for retirement should be able to go to a financial advisor and rely on them to give the best advice — but right now, that is not always the case,” the report alleges.
Many of the companies told Warren’s office they had disclosed the conflicts of interest in disclosures distributed to clients, thus mitigating the impact of any conflicts of interest, according to the report.
But these product prospectuses can be hundreds of pages long, and the disclosures can be difficult to find or decipher.
The nonpartisan investigators at the Government Accountability Office (GAO) found that although the disclosures are generally available, they are “not always clear or understood,” according to a report released in July. Warren’s investigation referenced this report, which reviewed more than 2,000 conflict of interest descriptions and was based on 75 undercover calls to investment advisers.
While the GAO encouraged investors to ask their provider about conflict of interest, the agency noted that “doing so may not always produce helpful information” based on the undercover calls.
A Biden administration rule to crack down on advisers who prioritize commissions or perks when recommending investments or products was supposed to go into effect this week, but it was halted this summer by a U.S. judge who sided with an advocacy group representing insurance and annuities distributors who challenged the rule in court.
The Federation of Americans for Consumer Choice and several individual insurance agents sued the Labor Department days after it finalized the new rule in April, calling it “just the latest salvos by the DOL in its almost 15-year quest to re-define what it means to be an ERISA fiduciary in contravention of the will of Congress.”
The plaintiffs argued the new rule violates the 1974 law that established minimum standards for private retirement and health plans, the Employee Retirement Income Security Act (ERISA).
The Labor Department argued these changes are necessary to regulate an investment market that has changed significantly since the law was first put into place, with the modern 401(k) created by Congress four years later, in 1978.
One change, for example, would have expanded requirements from only professionals who provide advice on a “regular basis” to include those who make a one-time recommendation, such as a one-time transaction to roll over retirement savings from a 401(k) into an IRA.
The Certified Financial Planner Board of Standards, the nonprofit that upholds financial planning standards, has stated that it supports the rule, “emphasizing that it aligns with investor expectations.”
But Judge Jeremy Kernodle for the U.S. District Court for the Eastern District of Texas sided with the plaintiffs in July, staying the rule.
Kernodle concluded the rule is “an arbitrary and capricious exercise of DOL’s regulatory power” that conflicts with the text of ERISA and would cause the plaintiffs “irreparable harm in the absence of relief.”
He also noted the new rule “suffers from many of the same problems” as the department’s 2016 rule, which would have expanded the definition of fiduciary investment advice but was struck down after a challenge by other lobbying giants including the Chamber of Commerce and the Securities Industry and Financial Markets Association.
The pattern is a familiar one: The Biden administration proposes new rules to rein in powerful industries, only for representatives of those industries to challenge them in court. A nationwide ban on noncompete agreements and a slate of new investor protection rules also were overturned over the summer.
The Labor Department last Friday appealed the decision. But since the Supreme Court this summer overturned Chevron deference, which compelled judges to defer to agencies when a law or statute is ambiguous, the government faces an uphill battle in court.
House Republicans also introduced a resolution in May to disapprove the retirement security rule under the Congressional Review Act, which allows Congress to overturn certain actions by federal agencies. The resolution passed out of the House Education and Workforce Committee in July.
Rep. Virginia Foxx (R-N.C.), who chairs the committee, characterized the Labor Department rule as the “Retirement Insecurity Rule” during her opening statements before the markup.
The rule “represents a reckless overreach by the Biden administration that will have devastating impacts on Americans’ retirement savings. It will eliminate options for working-class Americans, reduce their ability to retire, and limit their access to financial advice,” Foxx said.
Warren warns that if the resolution is successful, “hidden kickbacks and junk fees will continue to hurt millions of Americans planning for retirement and cost them billions of dollars.”
The White House, on the other hand, estimates conflicts of interest among advisers cost retirement savers as much as $5 billion per year alone on fixed-index annuities, which attract low-risk savers but carry higher costs and fees than investments in comparable mutual funds.
Mutual funds that compensate advisers based on whether their client invests in a fund are also associated with lower average returns, according to the July GAO report, which called such a compensation structure “a proxy for conflicts.”
“This could reduce retirement savings’ growth over time and could make a difference of tens of thousands of dollars for investors in actively managed domestic equity funds at retirement,” the GAO found.