Trump's fiduciary delay will cost retirees $2.8B, critics say

[Amica Nostra 4,803]

 

 

http://thehill.com/regulation/labor/327445-trumps-fiduciary-delay-will-cost-retirees-28b-critics-say

 

 

 

 

© Getty Images

American workers will lose $46 million in retirement savings each day the Obama-era fiduciary rule is delayed by the Trump administration, critics say.

The AFL-CIO and Sen. Elizabeth Warren (D-Mass.) released a “Retirement Ripoff Counter” on Wednesday, which tracks how much money American workers lose each moment the fiduciary rule is delayed.

“That money matters — it’s the difference between retiring with dignity and fighting to stretch every dollar as far as it will go,” Warren said.

The Labor Department’s fiduciary rule prohibits financial advisers from providing advice that does not benefit clients to those who are saving for retirement.

Currently, these “fiduciaries” must provide retirement savers with good advice, but they may steer clients toward second-tier products in an attempt to make more money for themselves. The fiduciary rule blocks this practice, requiring retirement financial advisers to act in the best interest of their clients.

“That’s not too much to ask,” AFL-CIO President Richard Trumka said. “We pay them, and they should work for us.”

But Republicans argue the fiduciary rule would drive up the cost of seeking retirement advice, forcing many savers to invest on their own.

President Trump ordered the Labor Department to review the rule, and on Tuesday the agency delayed it by 60 days.

The Retirement Ripoff Counter claims savers lose $532 per second, $1.9 million per hour and $46 million per day. This comes out to nearly $2.8 billion over the 60-day period the rule will be delayed.

The Retirement Ripoff Counter does not track how much money savers lose so much as how much more money they could have made had they received the best retirement advice.

These figures are based on a 2015 cost estimate from the White House Council of Economic Advisers, which claimed retirement financial advisers swoon people out of $17 billion each year in retirement savings. That means the average worker receiving conflicted advice will run out of retirement money five years sooner.

[CaliCat 3,957]

Man! The winning just doesn't stop! 

[TBoneTX 45,301]

Do we know why the Labor Department decided to delay the rule?

[Dashinka 24,505]

3 hours ago, TBoneTX said:

Do we know why the Labor Department decided to delay the rule?

That would be a good question, but it doesn't fit the narrative.

[OriZ 3,157]

I have two questions about this: 

 

1. How do they determine how much money is "lost"? How do they know what's a good advice vs a bad one?

 

2. Just because something is law, doesn't mean people do it. They can always claim that's the advice they "thought" would be best, I don't understand how this helps at all. 

 

If we're looking for someone to blame, we need to start with the Fed for ZIRP and QE, lets count the money lost from that. It's going to be in the trillions.

 

EDIT: I'm in the process of reading the cost estimate, there might be some answers there. But what I've read so far, has nothing to do with deliberately bad advice.

Edited April 6, 2017 by OriZ

[OriZ 3,157]

OK. So partial explanation found in pages 12, 13:

 

Conflicted payments can also lead to underperformance as a result of poor timing in investment decisions. Studies that compare the performance of mutual funds do not necessarily capture this effect, which results from the timing of individual investors’ decisions to buy and sell. While poor timing in investment decisions, referred to as market mis-timing, exists for reasons other than conflicted payments, conflicted payments can exacerbate the problem as trading strategies with poor timing may generate higher conflicted payments. Friesen and Sapp (2007) estimate that timing issues from all sources could lead to 100 to 200 basis points of annual underperformance and that these losses appear to be larger among a particular group of funds (load funds) offering conflicted payments. Other research also suggests that conflicted advisers often do not steer clients away from excessive trading, another source of investment losses due to poor timing (Hackethal et al. 2012b).

 

Further explanation in 22, 23.

 

Households differ in their financial characteristics, such as net worth and income; their knowledge of personal finance; and the competing demands on their time. Customers purchasing mutual funds characterized by conflicted payments differ modestly from those purchasing mutual funds directly along certain dimensions, such as income and education (Bergstresser et al. 2009). If correlated with their investment needs or abilities, these differences could lead to underperformance among funds characterized by conflicted payments. However, as noted in the original paper, while these differences could easily lead to differences in willingness to pay for advice (in either direction), it is not clear why they would necessarily lead to differences in underperformance after accounting for the fees that provide compensation for the adviser. Households from all backgrounds fall subject to common behavioral biases, such as over-confidence, over-optimism, and loss aversion. These biases often lead to lower investment returns because they lead households to (i) trade excessively by seeking active management or chasing returns, (ii) sell winning investments while holding losing investments, (iii) overweight past returns, or (iv) underdiversify.13 If households affected by these biases disproportionately hold funds characterized by conflicted payments, it may be the case that these biases, rather than the conflicts of interest among financial advisers, lead to the underperformance. This second possibility is less directly addressed by papers that focus solely on underperformance at the fund level. However, turning to the other results reviewed above that directly examine financial advice provides insight. For example, Mullainathan et al. (2012) find that in a sample of advisers who predominantly rely on conflicted payments for their income, advisers often recommend substantial changes to portfolios that currently follow best practices and are less likely to recommend changes to portfolios that do not follow best practices when doing so would likely reduce their earnings. This finding raises significant doubts about the extent to which conflicted advice is serving as a brake on behavioral biases.

 

The report's conclusion, page 25:

 

This report examines the evidence on the cost of conflicted investment advice and its effects on Americans’ retirement savings, with a focus on IRAs. CEA’s survey of the evidence suggests that conflicted advice reduces investment returns by roughly 1 percentage point for savers receiving that advice. In the aggregate, such savers hold about $1.7 trillion of IRA assets. Thus, we estimate the aggregate annual cost of conflicted advice is about $17 billion each year. The conclusions of this report are based on a careful review of the relevant academic literature but, as with any such analysis, are subject to uncertainty. However, this uncertainty should not mask the essential finding of this report: conflicted advice leads to large and economically meaningful costs for Americans’ retirement savings. Even a far more conservative estimate of the investment losses due to conflicted advice, such as half of a percentage point, would yield annual losses of more than $8 billion. On the other hand, if conflicted advice affects a larger portion of IRA assets than the $1.7 trillion considered here—or if the estimate were extended to other forms of retirement savings—the total annual cost would exceed $17 billion.

 

All that said, I don't see how this rule prevents that. Again, how do you prove they gave conflicted advice? Maybe, according to them, they really thought it was good advice? Advisors give bad advice to investors all the time, I personally find them to be quite useless. They are often optimistic when they should be pessimistic and pessimistic when they should be optimistic. With the rule or without it, investors and retirees lose money because of bad advice.

[TBoneTX 45,301]

2 hours ago, OriZ said:

All that said, I don't see how this rule prevents that. Again, how do you prove they gave conflicted advice? Maybe, according to them, they really thought it was good advice? Advisors give bad advice to investors all the time, I personally find them to be quite useless. They are often optimistic when they should be pessimistic and pessimistic when they should be optimistic. With the rule or without it, investors and retirees lose money because of bad advice.

The goal probably is to haul them into court or before a Congressional panel to undergo some grandstanding.

If investing or financial advising were a hard science, we'd all be filthy-rich.

Much of the advice probably varies in accordance with the investors' stated risk-tolerance.

Good grief.

[OriZ 3,157]

15 minutes ago, TBoneTX said:

The goal probably is to haul them into court or before a Congressional panel to undergo some grandstanding.

If investing or financial advising were a hard science, we'd all be filthy-rich.

Much of the advice probably varies in accordance with the investors' stated risk-tolerance.

Good grief.

That would be my guess. It's all about covering one's (TOS violation) it seems. 

 

The advice does vary in accordance with the risk tolerance but also there's no denying that there are interests. Advisors have many of their own interests, I just don't see how this rule practically solves that.

[Amica Nostra 4,803]

Everyone except the banks agree this is a good move. They don't see it as in their interest (surprise)