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Criticism of Conflict-of-Interest Rule for Financial Advisers Misses Mark


At CBPP Senior Fellow Jared Bernstein’s On the Economy blog, he and New York University Law School professor Lily Batchelder respond to criticism of a proposal designed to ensure that financial advisers always put their clients’ interests above their own.  Here’s their post:

In objecting to our op-ed on the importance of ensuring that financial advisors place their clients’ best interest ahead of their personal profits, Dirk Kempthorne, the President and CEO of the American Council for Life Insurers, offers a misleading argument, built on a large, incorrectly cited number.

In arguing on behalf of the new conflict-of-interest rule proposed by the Labor Department [DOL], we pointed out that the cost of conflicted advice was steep. Independent research finds that when savers receive conflicted advice, their returns on their retirement savings fall by an average of a full percentage point compared to other savers.  Over 35 years, that difference can lead to a 25 percent loss in their retirement nest egg.  Each year, it is estimated that families lose $17 billion in savings due to conflicted advice.

In response, Kempthorne suggests that the proposal hurt savers by reducing the amount of advice they receive — as if all advice is necessarily good advice — and then incorrectly cites an estimate that actually makes our point, not his.  He writes that “by the [Labor] department’s own estimate, financial losses associated with the lack of advice amounted to $114 billion in 2010 alone,” implying the rule will increase these costs.

In fact, the number he cites is DOL’s estimate of savers’ losses from investment mistakes in general, regardless of whether they receive advice or not.  It includes mistakes due to getting no advice, mistakes due to getting good advice but not following it, and the very losses that the DOL’s proposal would address — mistakes due to following bad advice from advisers who consciously or unconsciously respond to the structure of perverse incentives that conflicts of interest create.

As we have argued, the proposal would reduce these losses by mitigating many of the harmful effects of conflicts of interest on savers’ returns.  Indeed, DOL conservatively estimates that the proposal would save investors $4 billion per year. Moreover, they have signaled that they plan to improve the proposal by incorporating constructive suggestions from many of the stakeholders that Kempthorne mentions.

Kempthorne may have simply misunderstood the number he cited.  But unfortunately, it is all too common for lobbyists opposing a proposal to forecast disastrous results while citing numbers in a misleading way.  In the interest of retirement security, we mustn’t allow such scare tactics to throw us off track.