Despite facing a hung congress on several issues, Obama went ahead to push his economic agendas last week at a speech given to the AARP. One item in Obama’s wish list is to create and implement harsher guidelines for retirement fund advisers. This move has been felt necessary by Obama as for him, the loss of retirement money saved up by hard working and toiling Americans exacts a huge toll on their lives.
While, harsher rules already exist for investment advisers who are under a strict requirement of ‘fiduciary duty’, i.e., a faithful adherence to the client’s interests, no such strict and absolute standard exists for those who handle retirement funds. For the latter, they are only under a requirement to refer policies and instruments or savings plan most ‘suitable’ to a retiree’s savings level, age and risk appetite.
This looser standard allowed much room to maneuver for retirement fund managers as they indulged in the unethical practice of receiving kickbacks for steering retirees to poor quality investment schemes, where the pay-in is higher and the returns are low. Currently, such an advisor can easily escape the softer standard by stating that such a scheme was found to be suitable for an investing retiree’s risk appetite and was suggested so only after due consultation.
However, the above may now change because Obama has proposed to bring retirement fund advisors and managers also, under the exacting principle of ‘fiduciary duty’. Fiduciary duty principle demands an investment adviser to suggest only those schemes to retirees that will give the best returns. This principle also demands advisers to keep the client’s interests foremost and much ahead of self’s interests.
Obama’s small reformation step in this direction can have positive ramifications across the economy as retirees will not be led into unscrupulous investment schemes. Moreover, according to an estimate by Jason Furman, the chairman of The Council of Economic Advisers, this simple reform by Obama could help save up to $17 billion each year for more than 40 million families who have saved up money in retirement accounts.
This is not the first time that Obama has come out with such a proposed measure. In 2010 too, Obama had proposed something similar, which at that time had received stiff resistance from most financial advisers who repeated standard counterarguments then. This time around too, similar counterarguments have been raised.
Tim Pawlentry, who is the current President and Chief Executive of the Financial Services Roundtable, remarked that any such Obama proposal could raise costs for professional financial advice and put such services out of reach of most retirement fund savers. However, Obama has been adamant in his stance and even went on to state that such financial services should not even exist if their business models relied on mulcting hardworking Americans out of their retirement money.