The 2008 financial meltdown devastated retirement portfolios, turning the lifelong dreams of countless Americans into bitter disappointments. A double whammy for many retirees was realized when they discovered their supposedly balanced investments were anything but and asked their brokers what happened.
Advocates for retirees say in some cases people failed to understand their brokers’ fiduciary role. Though a broker’s business card might say “financial adviser,” often his first duty is to his firm.
“People get advice from folks as they approach retirement, but they really aren’t sure whether the investments they are encouraged to make are in their best interest or their adviser’s,” said Cristina Martin-Firvida, director of economic security with AARP.
Enter the federal Financial Regulatory Reform Act of 2010. The landmark legislation passed last summer in a 2,319-page bill seeks to lay the groundwork for a broad overhaul of the nation’s financial-regulatory apparatus. (See the White House’s spin on the need for reforms in this video and accompanying text.)
Part of the reform act instructs regulators to draft rules requiring financial advisers, brokers, investment advisers and others to be crystal clear with their clients about whom they represent. If their primary duty is to their firm’s bottom line, they will need to explain that to their customers.
“Seniors can have a lot of assets to rip off,” Martin-Firvida said.
AARP says the effectiveness of the new law will turn on how well it is enforced. She said regulatory agencies, including the Securities and Exchange Commission and the soon-to-be-formed Bureau of Consumer Financial Protection, will need sufficient staffs.
“You can build a structure, but unless you populate it with investigators, it won’t work,” Martin-Firvida said.
Like other aspects of the giant reform law, the fiduciary-responsibility segment is a work in progress. Much of the legislation focuses on high-level regulation of banks and investment firms and is intended to create mechanisms that will require improved disclosure of investment risks associated with derivatives, credit-default swaps and other sophisticated financial instruments.
The SEC and other agencies are just beginning to draft rules, and some investment advisers say the eventual outcome is far from clear.
“The whole fiduciary-responsibility discussion makes everyone feel better that the government is doing something, but the question remains whether it will make retirees safer,” said Greg Ghodsi, a financial adviser with 360 Wealth Management Group, a division of Raymond James & Associates in Tampa.
Ghodsi said many practices tailored to prey on the elderly won’t be affected. He mentioned newspaper ads that lure investors with promises of high certificate-of-deposit interest rates.
“The ad might say 5 percent interest, and you might get that,” Ghodsi said. “The ads don’t say how easy it will be to get your money back after six months, and they don’t mention the daily calls you will receive trying to sell you an annuity.”
Chris Zander, a partner with Evercore Wealth Management in New York, cautions about unintended consequences. He said stable value funds that are common in 401(k) offerings might not be viable instruments if the insurance features of the funds fall under derivative regulations.
Zander’s firm specializes in high net-worth investors, and bases fees on portfolio values, not transactions. Like many in the investment industry, he chafes at the new law’s message that fiduciary disclosures today are inadequate.
“The goal here is to make things extremely more transparent,” Zander said. “I would have thought [transparency] was already a fiduciary standard for giving investment advice.”
But Barbara Roper, director of investor protection with the Consumer Federation of America, said more disclosure rules are never a bad thing.
“If the system works, retirees will benefit,” she said. “The major focus is to make the system safer. It is important that Congress not bend to industry pressure to lighten up regulation in the future.”
Roper said that many of the consumer-protection features of the law, which create the Bureau of Consumer Financial Protection within the Federal Reserve, potentially will benefit investors and borrowers in every age and income bracket.
Rules related to the fiduciary responsibility of investment advisers are expected early next year with other regulations to follow. Roper said the key to the law’s effectiveness will come from the enforcement system.
“Regulations only work if the regulators use the authority they’re given,” Roper said. “You can’t force someone to implement the rules effectively.”
Christopher Boyd, a former business reporter for the Miami Herald and Orlando Sentinel newspapers, is a freelance writer based in Orlando, Fla. He was a page-one columnist for the Miami Daily Business Review and Southeast correspondent for the Boston Globe. Boyd also has written for The New York Times, Newsday, the Chicago Tribune and The Dallas Morning News and was a contributing editor for Florida Trend magazine and Hispanic Business magazine.
Main Points of the Financial-Reform Law
- A 10-member council of regulators to oversee and ensure financial stability will be created with the treasury secretary as its head.
- A new agency to regulate mortgages and credit cards will be created within the Federal Reserve.
- Over-the-counter (OTC) derivatives trading will be put under supervision, and most of OTC derivatives must be traded through more accountable channels such as exchanges and clearinghouses.
- Banks can only invest certain amounts of capital in private equity and hedge funds, with investment amount no more than 3 percent of their first-class capital. Also, many derivatives-trading markets will have to go through central clearinghouses.
- A new bankruptcy-liquidation mechanism will be created with the Federal Deposit Insurance Corporation (FDIC) in charge. Large financial institutions must set aside more capital as risk reserve to ride out tough times.
- The Government Accountability Office will audit and supervise emergency lendings and low-interest loans granted by the Federal Reserve as well as all open-market trading transactions under the government’s interest policies.
- The Federal Reserve will supervise the salary system of chief executive officers of private-equity firms and have the right to break up large firms if they are deemed a risk to the broader financial sector.