Thomas Perez is the U.S. Secretary of Labor. Jeff Zients is the White House National Economic Council Director.
When you receive medical treatment, you know that your doctor has taken a sworn oath to consider your best interest. The same goes for a lawyer. But believe it or not, financial advisers operate under no such commitment, even though they hold your precious, hard-earned nest egg in their hands.
In fact, conflicted financial advice — where advisers put their own interests ahead of their customers’ interests — costs Americans who are saving for retirement some $17 billion a year. This has to change, especially as the retirement landscape shifts and fewer Americans have the fallback of a defined benefit pension.
That’s why earlier this year, the President announced he was taking action to enshrine a basic principle: that financial advisers should always put their clients’ best interest first.
Under the current system, most financial professionals are trying to do the right thing. But they are often allowed to recommend the investment option that is best for their own bottom line and not necessarily the client’s portfolio through what’s called a “suitability” standard. Some firms offer their brokers perks and bonuses — a trip to Hawaii for example — for meeting sales goals for particular products. When you sit down with your financial adviser, you want him or her thinking about your retirement security, not a tropical vacation.
This is not a case of bad people doing bad things. It is about good people working in a structurally flawed system. The goal of our rulemaking is to remove the perverse incentives and align the interests of advisers and the families they’re supposed to be serving.
When the Labor Department did its initial outreach, a lot of the feedback amounted to: “Problem, what problem?” But as we have explored the issue, there has been a growing recognition of the importance of having an enforceable best interest standard.
Some in the industry say they support the best interest standard in principle, but that it’s just too difficult to implement — they often say it would be “unworkable” for financial advisers to put their clients’ interest first. However, a substantial number of advisers already operate under a fiduciary standard, have found a way to abide by it and still do quite well for themselves.
That said, we have heard and understand the constructive concerns about logistical challenges; as long as addressing them doesn’t take us away from our North Star — an enforceable best interest standard — we are flexible on the question of how we get there. This is about providing guardrails, not a straitjacket.
So as we move forward, we are taking into account the range of views we heard during the robust outreach we’ve done to make sure we get it right. We have built a big table and invited everyone to pull up a chair.
The proposed rule reflected extensive, regular consultation with industry, consumers, retirement and consumer groups, civil rights organizations and others.
Since the proposed rule was published, the Labor Department has received some 336,000 comments on it, and we extended the comment period to allow every voice a chance to be heard. Last month, the Department convened four days of public hearings, and the comment period will remain open through September 24.
There have been many constructive suggestions for improvements, and we will consider them as the final rule is developed. Among many other things, we have heard concerns about potential burdens associated with the point-of-sale disclosure, data retention and the mechanics of implementing the best interest standard, and we’re committed to taking those concerns into account.
As a result of the input we’re getting, the Labor Department will be making important changes to streamline and clarify our proposal, addressing legitimate concerns that have been brought to our attention.
A secure retirement is one of the pillars of middle-class life in America. We cannot let it be eroded by an outdated regulatory system, created before 401(k)s even existed and when IRAs were in their infancy, that allows conflicted advice to degrade and deplete people’s life savings. The Obama Administration’s proposed rule is one of the most important steps we can take to help more Americans enjoy a dignified and secure retirement after a lifetime of hard work, and we are committed to seeing it through.