The Economic Cost of Conflict of Interest for Advisors on Retirement Investments

The White House Council of Economic Advisors released “The Effects of Conflicted Investment Advice on Retirement Savings” in February 2015, and the report is a must-read for anyone teaching courses on aging policy. 

The major focus of the analysis is on evidence of  “conflicts of interest” for those advising individuals on roll-over investment of IRA accounts, but the findings undoubtedly have relevance beyond that window on retirement planning.

The decision whether to roll over one’s assets into an IRA can be confusing and the set of financial products that can be held in an IRA is vast, including savings accounts, money market accounts, mutual funds, exchange-traded funds, individual stocks and bonds, and annuities. Selecting and managing IRA investments can be a challenging and time-consuming task, frequently one of the most complex financial decisions in a person’s life, and many Americans turn to professional advisers for assistance. However, financial advisers are often compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest: the best recommendation for the saver may not be the best recommendation for the adviser’s bottom line.

The report focuses on the quantifiable cost from conflicted advice, concluding that savers receiving such advice “earn returns roughly 1 percentage point lower each year.”  But isn’t there also a deeper cost, as the large swath of middle-income Americans, who may have justified fears of being able to safely evaluate investment risk and their investment advisors, do nothing productive with their savings? 

The New York Times editorial board draws upon the White House Council’s report to call for adoption of reality-based rules on fiduciary duties for the financial services industry.  See NYT’s “Protecting Fragile Retirement Nest Eggs.”