In the fierce debate over how Wall Street should help investors with their retirement savings, a consulting firm's study has gained a starring role, by concluding that tougher consumer-protection standards would sharply increase costs for investors. Now some consumer advocates are taking a closer look at the study -- and they're crying foul.
At issue is whether financial advisers should have to meet the so-called fiduciary standard when they work with consumers who are opening an individual retirement account. That standard requires advisers to act in a client's best financial interests, and many advocates argue that it includes helping the client avoid extra fees.
While the issue is complex, the stakes are huge. IRAs, typically filled with mutual funds, annuities and other investments, hold $4.9 trillion. That's even more than defined-contribution plans like 401(k)s, since IRAs often capture retirement-savings dollars when workers switch jobs.
But many advisers who steer clients to particular IRA investments are also acting as salesmen, earning commissions from products they sell -- a situation that creates problems in many instances when investors believe they're receiving neutral counsel. While the Department of Labor has tried to change that, advocating the tougher fiduciary standard, brokerages, insurers and mutual fund companies have fought back, arguing that the new rules will backfire, making it harder for middle-class investors to get any advice at all.
The latest star witness in this dispute: a study by consulting firm Oliver Wyman that shows the tougher standards would dramatically raise costs for investors. Since going public last year, the study has achieved the Washington policy-wonk equivalent of going viral, with write-ups by trade publications and industry groups and shout-outs from members of Congress. Most notably, the study was referred to by name in a Wall Street Journal op-ed penned by Ohio Republican Sen. Rob Portman earlier this month that opposed the fiduciary standard. Congressional Democrats have also chastised the Labor Department for failing to consider the costs of a fiduciary standard.
But the study's influence has frustrated many consumer advocates, who say the methodology is gimmicky and flawed. The paper "is a red herring," says Mercer Bullard, a former Securities and Exchange Commission official who is now a law professor at the University of Mississippi. "It's nothing more than a political document."
What gives? The paper was commissioned by a group of 12 financial services companies working with Washington law firm Davis & Harman, which the study says oversee about 40% of all IRA assets. Data was collected from only those 12 firms, which have remained anonymous; Oliver Wyman tallied the data. While Davis & Harman says those companies submitted detailed information to the authors, only industrywide conclusions were published.
Critics see that approach as a secretive one that gives financial services firms a chance to publish only the data that best supports their arguments, leaving the public with a one-sided view of the issue. "The industry wants to say this stuff is as credible as an academic analysis," says Barbara Roper, chief of investor protection at the Consumer Federation of America. "But it doesn't meet that standard. They start with the conclusions they want and appear to be working backward."
One key point of contention: The study shows that some of the least wealthy investors -- those with accounts of $10,000 to $25,000 -- pay $80 a year for financial advice when they work with financial advisers operating under a looser ethical standard. Those working with advisers held to the fiduciary standard, the study says, pay $135, on average, or around 70% more.
But as a closer look at the study shows, those figures represent only what investors paid directly to the middleman. They don't represent investors' all-in costs -- both what they pay to financial advisers and what they pay for investment vehicles like mutual funds or annuities. Those kinds of discrepancies have dramatic significance, since the main aim of the tougher ethical standard is to get financial advisers to recommend cheaper investment products. For instance, index funds and exchange-traded funds can cost as little as one-tenth the price of actively managed funds -- $10 a year per $10,000 invested versus $100.
Kent Mason, the Davis & Harman lawyer who organized the study, says that it wasn't feasible to collect and analyze enough data to do an analysis of all-in costs. "We did look at all-in numbers," he says. But "it was hard to do an apples-to-apples comparison." Mason also says that while the methodology may not be perfect, it was the best available, since the companies involved were determined to protect trade secrets. "There is a lot of proprietary information," he says. (Oliver Wyman did not respond to multiple requests for comment. Sen. Portman's office also didn't return calls for comment.)