A congressman’s suggestion that only independent financial advisors be permitted to give advice to participants in the small-company individual retirement accounts proposed by President Barack Obama may not go far enough, according to some financial advisors.
“It’s too narrow. It’s really missing the point,” said Scott Leonard, a senior economist with Trovena, a family office in Redondo Beach, California, that supervises about $500 million.
“The real issue is you want people who are legal fiduciaries [who will] put clients’ interests ahead of their own and disclose conflicts of interest,” he said.
Leonard’s comments came in response to remarks by Rep. Robert Andrews, D-New Jersey, chairman of the House Health, Employment, Labor and Pensions Subcommittee, which has oversight over retirement issues.
At a hearing last week, Andrews said that advisors who provide advice on IRAs should be independent of companies that sell investments.
In an interview, the congressman said that he will push to ensure that regulations governing IRAs are similar to those in the Employment Retirement Income Security Act of 1974. The act generally prohibits advisors affiliated with companies who sell investments from providing direct advice to pension plan participants.
Kevin Grant, vice president of retirement plans at Higginbotham & Associates in Dallas, said that requiring advisors to act as fiduciaries if they provide advice on IRAs is more important than requiring that links between advisors and financial service companies be severed.
“A fiduciary standard is a good way to go,” said Grant, whose firm manages about $500 million.
“You’re either a fiduciary or you’re not. If you’re going to be a fiduciary advisor, I don’t care who you’re connected to. I don’t think that’s the relevant issue,” Grant said.
The lawmaker’s push is rooted in President Obama’s fiscal 2010 budget proposal, which would require all employers that do not offer retirement plans to automatically enroll employees in IRAs unless the workers specifically opt out. The requirement aims to increase retirement savings for the estimated 75 million workers who do not have access to retirement plans.
“I don’t think somebody should be giving advice on your retirement money if they serve two masters, whether it’s your 401(k), your IRA or your defined-contribution account,” said Andrews, whose subcommittee is part of the House Education and Labor Committee.
“I want to be sure that the advice is motivated by what’s best for you, and not because their commissions are going to be higher or their incomes are going to be higher,” he said.
“By removing the link to products, you sort of get that, but not completely. It doesn’t mean that somebody doesn’t have some other agenda,” Leonard said. “The goal is to remove agendas other than giving your best advice.”
While many advisors welcome the prospect of requiring all advisors who work with retirement accounts to be independent of mutual funds, brokerage firms, insurance companies and other entities that sell financial products, some worry that the mechanism is not in place to serve additional consumers who need help managing an IRA.
“The infrastructure isn’t there to provide advice for all people who need it,” said Milo Benningfield, the principal of Benningfield Financial Advisors, a fee-only investment advisory firm in San Francisco that manages about $33 million.
“The number of independent advisors out there is a small fraction of the total advisors. The number of people who need advice is just enormous,” Benningfield said.
Requiring all advisors to be independent of companies that sell investments could lead to an increase in the number of independent advisors, Andrews said.
“More advisors would qualify and register as independent advisors. That’s kind of the point,” Andrews said. “There’d be a ready source of income for those advisors. The supply would meet the demand.”
Other advisors say that prohibiting advisors who sell their company’s products from offering advice on retirement plans is counterproductive.
“Who are they suggesting has the knowledge and education to sell these things, and to stay on top of it?” asked Jon Ten Haagen, a certified financial planner who is founder and principal of Ten Haagen Financial Group in Huntington, New York, which manages about $35 million.
Advice given by representatives who sell their company’s retirement products “can be conflicted, there’s no question,” he said. “But is [the restriction] necessary? I don’t think so.”
Bringing IRAs under the types of restrictions that 401(k)s are subject to under ERISA could make it more difficult to move ahead with President Obama’s automatic-enrollment proposal for IRAs, said Liz Varley, managing director for government affairs in the Washington office of the Securities Industry and Financial Markets Association, which has offices in New York and Washington.
“That would be a great way to kill their auto-IRA proposal,” she said.
ERISA applies to employers that offer retirement plans and sets requirements for employers to act as fiduciaries of the plans. However, IRAs that are owned individually, rather than through employers, would not have an employer in the role of fiduciary, Varley said.
If IRA automatic enrollment is mandated, “there’s a little bit more of an argument if you’re talking about an employer offering, or requiring, a payroll deduction arrangement,” she acknowledged.
But the need for regulatory protection must be weighed against the impact that added regulations would have on businesses, Varley said.
If the Obama plan becomes law, “you’re mandating on these small employers that they offer these arrangements, Varley said. “And on top of that, [are you] going to have the employers accept full ERISA fiduciary responsibility? It may not be in the interest of keeping their business running.”
Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.
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