Financial advisers are intended to be a lifeline to those folks who don’t have the time or expertise to research the best way to save for their retirement years.
But on Tuesday, President Joe Biden made the case that junk fees — his preferred term for hidden costs that have become so pervasive that they eat into everything from restaurant receipts to concert ticket purchases to rental fees — have, in their own way, snuck into the investment advice industry.
“When you come from a middle class family like I did, the thing that makes you the angriest is when you’re taken advantage of, I mean it,” Biden said during remarks at the White House on Tuesday. “These junk fees are hidden charges that companies sneak into your bill and make you pay more just because they can.”
Marking the latest move in his self-proclaimed war on so-called junk fees, Biden announced his Department of Labor is proposing a new rule to close cost-increasing loopholes in retirement financial advising, to ensure that financial advisors look out for clients first, maximizing those savings and investments, rather than the advisor’s own bottom line.
“Most financial advisors give their clients good advice at a fair price and are honest with them,” Biden said “But that is not always the case.”
“Some advisors and brokers steer their clients toward certain investments, not because they are in the best interest of the client – because it means the best payout for the broker. I get it, understand it. But I just want you to know we are watching,” the president added with a laugh.
The rule would cover non-securities like fixed indexed annuities, fiduciary advice and one-time transaction advice for things like 401(k) rollovers.
Financial advisers, the White House said in a fact sheet, may be paid by the saver or the firm making the investment product they recommend, though it argues that advisers may face a conflict of interest when they are paid more to recommend specific products that could generate lower returns for savers.
Advisors, the administration said, can earn as much as a 6.5% commission in recommending one retirement product — such as fixed-rate annuities that guarantee certain interest rates and payouts — over another.
“Over a lifetime, those conflicts of interest can really add up and cost retirement savers up to 20% of their savings,” National Economic Council director Lael Brainard said.
The proposed rule would update the definition of an “investment advice fiduciary,” ensuring that financial advisors would be required to adhere to “high standards of care and loyalty,” and amend exemptions to ensure that investors are given quality advice regardless of product or service.
“The promise of a good job and secure retirement, gives families, as President Biden often says, a little breathing room,” Acting Labor Secretary Julie Su said ahead of Biden’s remarks on Tuesday. “In President Biden's America, we are doing everything we can to make good on that promise. Today, this administration takes another step to help Americans save for secure, dignified retirement.”
Essentially, the proposed rules would ensure that advisors are held to standards of fiduciary duty, with the responsibility to put their clients above themselves.
“If they don’t, if they breach their fiduciary duty, they could face serious penalties including having to pay restitution and additional financial penalties,” Biden said.
“The problem we see right now is the exact kind of insurance product is too frequently driven by the financial incentives that financial institutions put in place, and not by what the customer really needs,” an administration official told reporters, adding that when a consumer is getting financial advice and purchasing investment products “that it’s really important that product is in your best interest. And if it’s not, the costs that you’re incurring are a real loss to your retirement security — it functionally means that you have less money available to you and a lower standard of living in your retirement.”