Who are all these very nice financial-planner people who keep inviting me out for a free dinner to talk about my retirement?
Here’s one of the invitations that came in the mail: “You and a guest are cordially invited to a Complimentary GOURMET MEAL” (capitalization theirs). Then, this invitation, like so many — I have 12 here in front of me — tells me that the GOURMET MEAL will be enjoyed “immediately following an informational seminar and insurance presentation” on subjects that include “retirement strategies,” “retirement myths” and “maximizing Social Security.”
Here’s another one, inviting me to McCormick & Schmick’s in Edina for “Almond Crusted Trout” or “Sliced Beef Medallions,” followed by “Seasonal Cheesecake.” One guy here is offering me a $100 restaurant gift card if I would just, please, let him into my house to “discuss important financial issues.”
I get all these lovely invitations because a) I’m over the age of 60, b) I’m breathing, and c) people attending these dinners often hand over lots of money to their hosts before they get to their seasonal dessert. These alleged “financial planning” events are examples of the ways that billions of dollars from the nation’s precious retirement nest eggs are being diverted into the pockets of these very nice financial-planner people.
This issue — the financial-services business’s habit of exploiting rather then helping people who are preparing for retirement — is why the Obama administration in April enacted so-called “fiduciary” regulations for financial planners and advisers.
These rules will require the financial-services industry — for the first time — to conduct business “in the best interests of their clients.”
You thought that already was the obligation. It is not. When you visit most financial planners or advisers for help choosing investments for a 401(k) or an IRA — whether it is in an office or over almond-crusted trout — those advisers/salesmen have no more legal obligation to give you honest advice than a car dealer does.
Consider those “free meal seminars,” just as an example. Regulators — the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority — sent investigators to 100 free-meal financial-planning seminars several years ago and came away with these truths:
All of them were really just hard-sell events disguised as cozy investment seminars.
At least half of the events included “exaggerated, misleading or otherwise unwarranted” investment information.
And 1 in 7 of these events “appeared to involve fraud.”
If a car dealer uses high pressure or deceptive tactics to induce you to overpay on a car, you have paid too much for a car, once. If a financial adviser, using those same tactics, misdirects you into lousy or costly investment products, you may lose money every year in retirement, as long as you live.
That is why, in proposing the new regulations last year, President Obama said: “I’m calling on the Department of Labor to update the rules and requirements that retirement advisers put the best interests of their clients above their own financial interests. It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.”
The SEC says Americans right now are losing $17 billion every year through inflated fees and inappropriate investments sold to them by predatory advisers. The administration’s new rules will be phased in before the president leaves office early next year. But the ultimate impact of the new rules will be out of Obama’s hands, since (it appears) either Hillary Clinton or Donald Trump will decide how, and if, they will be enforced.
The stakes are considerable. This money, the nest eggs of an aging America, will determine the dignity and dimensions of retirement for many millions of people — who, by the way, have few dollars to spare. By all accounts, a third of American households with residents older than 55 currently have zero retirement savings or pensions. Over 55. Zero savings.
Among those who have saved money for retirement — these are the people talking to financial advisers — the federal Government Accountability Office says the average nest egg is $104,000 for people between 55 and 64.
Let’s calculate what that means. On that $104,000 nest egg, most independent experts would say you can draw down about 4 percent per year to make it last a 25-year retirement. That’s about $4,000 a year. Add Social Security checks — the average annual Social Security payment is currently $16,020 — and you have a retired Minnesotan living on $20,000 a year ($36,000 for a couple if two people in the household are receiving average Social Security payments).
The lucky half of the workforce that has a pension does better. But, clearly, the Obama administration was wondering: What if we changed the rules for the financial-services industry so that some of that $17 billion in excessive fees and underperforming investments could be diverted back into the nest eggs of America’s struggling retirees?
The White House estimated that a retiree who receives bogus advice when rolling over a 401(k) balance to an IRA will lose an estimated 12 percent of that investment over 30 years. The ultimate impact: The retiree’s savings would run out five years earlier. Happy 80th birthday.
The president’s new regulations are aimed at a financial-planning industry that has a well-documented tradition of basing its business plan on customers’ fear, anxiety and neglect. It knows very well that most people view money management like oral surgery — a totally frightening bore. The industry responds to that anxiety and ignorance not with simplicity, openness and sound counsel, but with complexity, diversion, hidden fees — and shrimp cocktail.
Consider an analogy. Let’s say the car-selling business was designed like the financial-advising business. You would walk up to a car dealer, which would be called something reassuring like “Rock Solid Auto Advisers.” You would walk in, looking for advice. There would be no indication as to which cars were available, just friendly people asking you about your “long-term transportation needs.”
What you don’t know is that Rock Solid Auto Advisers only has, say, Chevy Impalas that week. No matter what you tell them about your long-term transportation needs — four kids, maybe, and a boxcar full of hockey equipment — they’re going to pressure you to buy a Chevy Impala, and probably one with the accessory package for which the manufacturer is paying the salesman a bonus that week.
This is the so-called “suitability standard,” which in this case means you could probably somehow cram your family in the Impala. The dealer would then say, “See! This car works for you!”
Under the new regulations, starting next year, the industry is supposed to use the Obama administration’s “best interest standard.” The dealer would have to show you the minivan brochures.
For the time being, that is not how the investment-advising business works. Advisers right now are offering advice without telling their customers that they are being paid by investment companies to sell particular expensive and highly profitable investment products, to the exclusion of other products, no matter the best interests of their clients.
I know of a family that recently assumed management of aging parents’ investments from a fee-heavy adviser. They reduced the portfolio’s annual fees from about $5,000 to about $500, with solid performance, just by rolling the money out of the expensive funds the adviser had recommended.
Indeed, the U.S. Senate Banking Committee surveyed investment companies last year and found that 87 percent “admitted to offering kickbacks” and other compensation to investment advisers/salesmen, and that the kickbacks — usually pushing sales of expensive, underperforming annuities — were “effectively concealed from customers.” As a result, the committee report said, “many consumers continue to receive investment advice from sales agents who have incentives to put their own interests ahead of their customers.”
By the way, I looked up the websites of all the people who recently invited me to dinner. Almost all of them were connected to insurance companies selling annuities.
All of which is why independent experts recommend that we all seek investment help from advisers who already have a fiduciary responsibility to put our interests first (ask them); that we generally pay advisers only by the hour, not through some indecipherable fee scheme, and that we should not generally buy investment products from the people who advise us (that’s called a conflict of interest).
The financial-services industry is publicly opposed to the new rules — just so you know. Their representatives say 1) the proposed regulations are “immensely burdensome,” are “difficult, if not impossible” to implement and would actually harm small investors, and 2) anyway, they are already self-regulating by publicly pledging to put their clients’ interests ahead of their own.
Those statements were made in public, where the industry is not required by law to be truthful. It is instructive to see what those same public companies are telling Wall Street investors, to whom they are legally required to be candid. The office of U.S. Sen. Elizabeth Warren, the Massachusetts Democrat, tracked how financial-industry CEOs described the new fiduciary rules to Wall Street. Burdensome and unworkable? Hardly. “[W]e don’t see this as a significant hurdle,” said one CEO. Another said his company can “address [the rule] quickly and effectively.”
What about all those comforting advertisements from big financial-services companies that unambiguously pledge to put customers’ interests first? The Public Investors Arbitration Bar Association (PIABA) looked into that last year. Turns out that the ads for nine major brokerage firms — Merrill Lynch, Fidelity Investments, Ameriprise, Wells Fargo, Morgan Stanley, Allstate Financial, UBS, Berthel Fisher, and Charles Schwab — indeed “advertise in a fashion that is designed to lull investors into the belief that they are being offered the services of a fiduciary.”
However, when the bar association looked at court documents in legal disputes between those companies and aggrieved investors, the companies were busy “denying that they have any fiduciary obligation.”
The new fiduciary regulations are supposed to force these companies to live by their advertising and stop with the raiding of retirement nest eggs. Then maybe America can start to get some of its $17 billion back.
Tony Brown is a Minneapolis writer.