Scott Cooley: Policy & Investing

Does Your Broker Have Your Best Interests at Heart?

Scott Cooley

On Monday, President Obama announced that he endorsed the Department of Labor's forthcoming proposal to reduce conflicts of interest in the provision of retirement advice, an initiative that would likely have the greatest impact on brokers. For many activities, brokers currently must meet only a relatively unrestrictive "suitability" standard, rather than the tougher "fiduciary" standard that governs the activities of registered investment advisors operating under the Employee Retirement Income Security Act, or ERISA. With apologies to Neil Armstrong, this initiative is a small step for regulators, and also a small step for investors. But it is nevertheless a step worth taking.

The Council of Economic Advisors has issued a report arguing that because brokers do not operate under a fiduciary standard, many of them provide "conflicted advice" that proves costly to investors. In particular, the CEA believes that when investors change jobs, brokers frequently persuade them to roll over assets from well-performing, lower-fee 401(k) investments to IRAs that may contain inferior investments. The CEA believes brokers' investment advice may be influenced more by the desire to generate commissions and earn sales awards for higher-fee funds, rather than serving the best interests of the client.