The news is slowly emerging that millions of middle class Americans will not have enough money in retirement. And, at least part of the reason is that they are not earning good returns on their investments; they are relying on bad advice from their financial advisors and jeopardizing their financial security. Can you trust your financial advisor with your retirement savings? Unfortunately, perhaps not.
Financial advisors currently have a strong financial incentive to recommend retirement products that pay them big commissions but too often do not deliver the best return on investment for their clients. They have no obligation to let their clients know this. According to John Bogle, founder and retired CEO of the Vanguard Group, financial advisors tend to recommend that people invest in actively managed mutual funds, which easily cost more than 2 percent annually in fees, including transaction costs. People could invest in passive funds like Vanguard’s Total Stock Market Index Fund that costs 0.06 percent annual. The additional revenue accrued from a passively managed fund can be enormous, “extra wealth of 65%,” over time.
President Obama, along with Senators Warren and Booker, recognize that it’s due time to strengthen the rules regulating financial advisors. Fiduciary standards that protect against conflicts of interest do not apply to advisors when people roll over their investments into IRAs and other retirement products. So, millions of people are unsuspectingly being told to invest their savings in financial products that yield lower returns in their retirement years. Annually, $300 billion rolls over from employer-savings plans to IRAs.
It goes without saying that advisors should have financial incentives to put their clients’ interests first and not be conflicted. Secretary of Labor, Thomas Perez explains, “The corrosive power of fine print, hidden fees and conflicted advice can eat away like a chronic illness at people’s hard-earned retirement savings.” Americans should be able to trust their financial advisors for their retirement planning.To protect the growing number of retirees in the US, Congress needs to strengthen retirement security.