FACULTY Q&A

A recent U.S. Senate investigation highlighting significant conflicts of interest in some financial adviser and client relationships cites the research of a business law professor at the University of Michigan’s Ross School of Business.

Dana Muir and her collaborators explore the history of fiduciary responsibility and the consequences of current regulations on who can give financial advice, the practices they are allowed to use and the legal standards they are held to. The study examined major public policy and economic shifts, and showed how these changes make unconflicted advice essential.

Based on the industry’s practices, Muir and her collaborators advocate for regulation that holds all those who provide advice to retirement savers to the same standard of fiduciary responsibility.

Muir discusses her work and recommendations.

What are some of the current ethical or legal challenges of fiduciary responsibility?

Figuring out who to trust to help you save and invest is too complicated in the current legal system. Most people believe all financial advisers have to give their clients advice in their clients’ best interest, but that isn’t true. It depends on the type of investment and the status of the adviser. That is a legal and ethical challenge that the legal system needs to address.

Are there any significant examples of people receiving self-interested investment advice?

After I testified in a Department of Labor hearing on this issue, a 39-year-old worker was convinced by a non-fiduciary insurance salesperson to rollover all of their retirement savings into fixed indexed annuities. Research shows commissions on those products can be quadruple the commission on other insurance products and the surrender fees to change investments can be up to 15% of the investment. Yet, under state law the insurance salesperson’s actions probably were legal.

How do existing conflicts of interest in financial adviser and client relationships affect everyday workers looking to save for retirement?

The costs of conflicted advice surprise most people. Even when the additional costs of an investment are small, those costs add up over a career to as much as 20%. The median 401(k) balance for people between age 55 and 64 currently is $87,571. If someone at the median avoided conflicted investment advice, their balance might be higher by more than $17,500. The average 401(k) balance for the same age group is $244,750, and their increased savings could be almost $49,000.

What are some of the regulatory opportunities to remedy these issues?

The Department of Labor issued a rule earlier this year requiring that all investment advice provided to retirement savers be in the best interest of the savers. That is common sense. Segments of the financial services have successfully challenged the rule in court so it has not gone into effect.

What is the next step for this line of research? Are there other aspects of fiduciary responsibility you plan to explore?

My co-authors and I continue to research legal avenues to increase the protection of retirement savers from self-interested advice providers. We are finding Congress intended the relevant law to provide strong protections.

Independently, I am exploring the application of fiduciary responsibility to the protection of retirement assets from hackers and a variety of data security breaches. That is a growing risk for people’s retirement savings.