Bad investment advice

By  via vox.com   Article

The Obama administration has a plan to crack down on bad investment advice

“The White House is asking the Labor Department to change the rules on how financial advisers advising clients on retirement savings decide what to tell their clients. The department will today submit a draft rule saying advisors should all follow a ‘fiduciary standard.’ Under that standard, advisers have to put clients’ interests first and disclose any conflicts of interest.

That is as opposed to the ‘suitability standard,’ in which advisors merely have to give clients advice that meets their broader needs and retirement goals.

Different types of financial advisors have to use different rules: there are what are called registered investment advisors, who follow the tougher fiduciary standard (and also tend to serve wealthier clients, as Investopedia writes). But brokers only need to follow suitability standards. …

That means that a broker might, for example, push people to invest in plans with higher fees because those funds will also help the broker to get a higher commission. In a report released Monday, the White House uses the example of a broker that pushes a saver to roll an old 401(k) over into a (higher-fee) IRA, as opposed to leaving it with the old employer.

That conflicted advice can cost a worker in a huge way. ‘A typical worker who receives conflicted advice when rolling over a 401(k) balance to an IRA at age 45 will lose an estimated 17 percent from her account by age 65,’ the White House writes in a report released Monday. He adds that if there are $100,000 in that account, it could grow to $216,000 in 20 years without the bad advice, as opposed to $179,000 with the conflict of interest.

A new rule will not take effect immediately, however, and as the Washington Post reports, the details of the rule won’t be available for a few months.”

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