The wrong financial advice can have a massive cost.
Financial advisors may make recommendations even when they face a conflict—for instance, an incentive to sell specific financial products. If those products, such as mutual funds or annuities, aren't really in your best interest, because they underperform or cost you more money over time than would a cheaper alternative, the advisors still get their commission, but you lose out.
So how much does this conflicted financial advice really cost you? A lot, according to the White House’s Council of Economic Advisers, which has found that Americans lose around $17 billion a year.
Now the nonprofit, nonpartisan think tank Economic Policy Institute has broken that amount down by state—and finds that investors in some of the biggest states like California and Texas may be collectively losing over a billion dollars every year. Even small states like Rhode Island rack up $87 million in annual investor losses, the EPI found.
To calculate the cost of financial conflicts by state, the EPI looked at the underperformance of individual retirement account assets that are invested in products for which investors received “conflicted” advice. The EPI then considered the state distribution of the market value of IRA accounts.
The good news: These numbers could soon start to shrink. The Department of Labor’s new rule requiring financial advisors to act in your best interest is set to take effect—after a 60-day delay—on June 9, 2017.
The rule aims to protect retirement savers from bad advice and keep more money in their pockets. It will require that any financial professional who gives advice on how to invest your retirement assets act in your best interests and do his or her best to mitigate any potential conflicts of interest. Additionally, advisors need to charge reasonable fees and cannot lie to you.
While this may not sound controversial, for many years brokers have been allowed to put clients into expensive or risky investments, even if there were cheaper alternatives. Many times, advisors recommended these products because they received higher commissions to sell them—hence, the conflict. And they could get away with it because investment recommendations needed only be "roughly suitable" for clients.
Experts believe the new rule will, over time, force advisors and their firms to be more transparent about compensation policies and product fees. But it will also mean more fine print for investors to review, says Marcia Wagner, an attorney specializing in retirement and securities laws.
“People need to take the management of their money seriously—they work hard enough to get it, so they should really work hard to understand what’s occurring with it,” Wagner says.