The latest massive offense the Obama administration has done to Wall Street is to come up with a rule telling financial services companies that their first duty is to their clients. That's such an offensive requirement, Republicans in Congress have even been trying to derail it. Because nothing should stand in the way of profits for Wall Street, including the nest eggs of senior citizens. To prove how awful the whole idea is, American International Group Inc. (AIG) decided they had to sell off, admitting that if they can't screw old people out of money, then why bother?
"It’s a business we are not the best owner of, particularly in the light of potential Department of Labor rules," [CEO Peter] Hancock said Tuesday in a conference call updating investors on AIG's strategy. "With the new DOL rules, that was a big factor in thinking whether this was better owned by somebody independent of us." […]
Hancock said the broker-dealer network earned about $40 million in 2014, yet consumed a "disproportionate amount" of AIG's compliance cost. The sale was part of a larger plan the insurer announced Tuesday to simplify operations and improve results, as the New York-based company faces pressure to break up from activist investor Carl Icahn.
What can you do with a measly $40 million that has to be earned honestly? What the new rule says is that instead of pushing their own retirement products, or those that they've been commissioned to sell, financial advisors have to consider what's best for the portfolio of their client. That's something that you would kind of take for granted that's already happening, if you didn't know better. Now you do know better.
A White House Council of Economic Advisers analysis found that these conflicts of interest result in annual losses of about 1 percentage point for affected investors—or about $17 billion per year in total. To demonstrate how small differences can add up: A 1 percentage point lower return could reduce your savings by more than a quarter over 35 years. In other words, instead of a $10,000 retirement investment growing to more than $38,000 over that period after adjusting for inflation, it would be just over $27,500.
That's $10,500 per investor that AIG can't live without, apparently. The thing is, the rule doesn't even necessarily preclude brokers from earning the commissions—they just have to disclose to investors the fees and incentives they're getting that might influence their investment recommendations. They can still get those commissions and those incentives, they just can't keep it a secret. And that's the end of the world for them.