Investing in a House of Cards

In a plot worthy of Kevin Spacey’s House of Cards, cynical Washington, D.C., lawmakers are promoting legislation that requires the Securities and Exchange Commission (SEC) to write investor protection rules before the Department of Labor (DOL) completes its rule. The proposed DOL rule requires brokers and others who intersect with an investor’s IRA, 401(k) or other tax-advantaged savings plans to put the “best interest” of the customer ahead of their own, such as higher commission for a lesser investment product.

The author of this legislation, Rep. Ann Wagner (R-Mo.), said at a recent House financial services committee that she’s fought her “whole life” for the “low income” savers, a goal she says this bill advances. But as Frank Underwood would explain to the audience had he made such a comment, “One must say such things.”

Wagner’s bill is numbered HR 1090. HR 1090 is a delay tactic. The SEC is not close to completing its parallel rule. At a House hearing just last week, Rep. French Hill (R-Ark) pressed the SEC’s Division of Investment Management Director Grim to assess the progress at the SEC. “Ninth inning? Beginning of the game?” Rep. Hill asked. Grim could give no answer at all. He could not say if the SEC was at the beginning, or the middle or the end, or anywhere at all.

Indeed, the Rep. Wagner makes no secret of the intent behind her bill. She openly calls it part of her “war with the Department of Labor” to block the rule.

The DOL rule promises to return an estimated $17 billion each year to investors who currently suffer when brokers and others fail to put investor interests first. Pay schemes where a broker makes more in commission to recommend one product rather than another undoubtedly impacts his advice and can harm the investor.

Naturally, Wall Street isn’t ready to hand that $17 billion back to investors without a fight. The House of Cards tactics also include bizarre rhetoric and made-as-instructed industry funded studies delivered under the banner of respected think tanks. Wagner calls her bill the “Retail Investor Protection Act,” a classic three-card monte misdirection.

The bizarre rhetoric builds on the pain-is-pleasure argument that brokers must hurt lower income investors just a little bit to justify their time helping them on such modest balance account. The fact is, many larger broker-dealer firms require their registered representatives to meet minimum sales goals before they receive compensation, according to Ron Rhoades, an industry consultant and member of the Committee for the Fiduciary Standard. As a result, these smaller investors, if they are served at all, are often directed to advisors located in call centers. “Hence, to the extent Wall Street firms threaten to ‘abandon’ small investors, it must first be realized that many of these brokerage firms have, in essence, already largely abandoned smaller investors.”

The financial services industry does not lack for people willing to manage other people’s money. There is an abundance of advisors who have self-selected themselves to oblige a fiduciary standard. Wealthfront, for example, is an SEC-registered investment advisor. It charges no fees for accounts under $10,000, and 0.25 percent of account value for those of more than $10,000. Generally, it advises passive index funds.

As for industry-funded studies, Sen. Elizabeth Warren (D-Mass) exposed this cynical tactic when she questioned the patronage of a study by economist Robert Litan. Litan’s study described the harm lower income investors will suffer under the proposed rule, an argument undressed by Barb Roper of the Consumer Federation of America.

In his testimony before a Senate labor committee where Warren serves, Litan described himself as an affiliate scholar of the prestigious Brookings Institute. An observer might believe that if a Brookings scholar comes to such a conclusion, it might be more credible than if an industry economist reached that finding. In subsequent questions to Litan and Brookings, Warren asked about funding for the study, which came from a firm opposed to the DOL rule. Brookings responded to the questions by terminating Litan’s affiliation. Prof. Jane Dokko, another Brookings scholar, summarized the problem: “To no surprise, those benefiting from current practices have paid for research to try to discredit the proposed rule.” Dokko further found that independent research not funded by industry “concludes” that “advisors tilt their recommendations so they receive higher pay.”

Finally, lawmakers could not ask for a clearer plot summary for this House of Cards episode than in the recent attack on the DOL rule from the cluster of Koch brothers funded organizations.

They summarize their critique as “Obamacare for your IRA.”

Bartlett Naylor is the financial policy advocate with Public Citizen’s Congress Watch division.

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