Let me be clear: I resolutely oppose bad advice. The guy who recommended you wear a baby-blue tux to the high school prom? Outrageous. The same could be said of leisure suits, Pickett’s charge, and the junior officer who said to Custer, “I say we attack — what’s the worst thing that could happen?” (Actually, that last one came from an old ad campaign, but you get the point).
Then again, if bad advice were illegal, we couldn’t build enough jails. And finding someone willing to recommend a restaurant or barber shop would be impossible. That hasn’t deterred President Obama, who this week declared war on “bad financial advice,” putting his weight behind new regulations designed to protect us all from financial advisers who make too much money.
Like so many bad policy ideas bouncing around Washington, it’s hard to argue with the sentiment. No one wants to see a neighbor, friend, or family member make a bad financial decision, and there’s no question that consumers should be adequately protected from fraudulent or deceptive business practices. Which is precisely why we have a Securities Exchange Commission empowered to enforce the 1940 Investment Advisers Act.
Obama apparently decided, however, that the SEC isn’t up to the task. His new rule falls under the Department of Labor and will effectively define anyone who assists with your IRA or 401k as a “fiduciary.” That means they will be required to devote more time to customers and apply a higher standard of service to their accounts. Instead of promoting investments that are “suitable” based on criteria such as age or risk appetite, advisers must now operate in the client’s “best interest.” That sounds terrific, but in business, everything costs money.
The question isn’t whether meeting this “fiduciary” standard is good or bad, but whether it is right for every retirement account. The standard carries additional burdens, liability, and higher costs, and it will probably restrict the use of commission-based payment. For many customers with smaller retirement accounts, the cost of higher levels of service, coupled with limits on compensation, could mean it’s no longer economically feasible for asset managers to service those accounts. The potential result — fewer options for small investors — would be a yet another example of the unintended consequences of government regulation.
In 2010, similar rules were withdrawn after encountering strong bipartisan opposition — even Barney Frank raised concerns! — and it’s not yet entirely clear how the new plan differs from that aborted effort. Labor Secretary Tom Perez vaguely suggested that final language will be released “in a few months.” Beating up on Wall Street never goes out of style, but the announcement blindsided members of Congress on both sides of the aisle. Senator Jon Tester, a Democrat from Montana, worried aloud, “If we take away options and the rules are not harmonized [with the SEC] it will be a disaster.”
Part of this may just be an effort by Obama to bounce back after his disastrous and short-lived budget proposal to tax millions of college savings plans. That idea also met with near universal opposition, prompting the White House to quietly walk away from its own recommendation just a week after its release. All this retirement talk enables him to change the subject quickly should someone irritatingly mention his plan to tax college savings.
While no one should be surprised that business concerns oppose the regulations, the breadth of the resistance is telling. Does the president really believe that companies like Fidelity and Prudential are the “bad actors” he claims to target? Conversely, if those bad actors are few and far between, requiring everyone to meet the “fiduciary” standard isn’t the most efficient way to solve the problem. It’s the regulatory equivalent of using a sledgehammer to drive a finish nail: You might succeed, but there will be plenty of shattered cabinetry in the process.
Equally important, there are far more pressing issues in the financial system that the administration continues to ignore. Start with Fannie Mae and Freddie Mac. They should have been reformed years ago, but the White House lost interest when the firms started making money and paying dividends to the Treasury. Now, as profits have begun to fall, they’re underwriting riskier mortgages — with taxpayers still on the hook for their growing debt. An even bigger crisis looms on student lending. Outstanding debt has topped $1 trillion, and default rates are more than 13 percent — double the rate just 10 years ago.
Unfortunately, solving these problems would require Obama to actually engage with Congress, to help write legislation, and — yes — compromise. Something his advisers have obviously recommended against. Now that’s the kind of bad advice that should be illegal.
John E. Sununu, a former Republican senator from New Hampshire, writes regularly for the Globe.