What new regulation bodes for retirement

Like the winds of war that swept through the antebellum South in the opening scenes of “Gone with the Wind,” the investment and retirement world we know is changing and about to end badly. New regulation will reshape the landscape in ways that probably will make retirement more difficult for your clients.

The most sweeping change is likely to be the application of a fiduciary standard to all financial service providers. No longer will broker-dealer registered representatives be allowed to put the hunt for commissions ahead of customer interests. Of course, brokers see this change as a harbinger of the death of capitalism.

The truth is, capitalism won’t die. But investing will be profoundly changed. Yes, investors will be more protected, but they also may be coddled just at the time when prodding actually may be in their best interests. While brokers do profit handsomely by fueling market euphoria, their sales efforts also provide the kindling to restart markets that are mired in negativity. We may come to miss the paradigm-shifting power of a commission-driven sales force when markets invariably turn down again.

Other unintended consequences can be expected if a consumer financial protection agency is created to oversee the standards for sales of credit-related products to consumers. Home mortgages, credit cards and other forms of loans would come under the umbrella of a CFPA, and the consensus among consumer-loan professionals is that proposed reforms would radically increase the cost of borrowing and thereby reduce the availability of credit to the elderly and other “at-risk” borrowers.

As an example of what will surely happen following CFPA creation, consider the fallout this year when pro-consumer credit card legislation was passed. There was a radical, and almost immediate, increase in credit card interest rates, followed by a commensurate increase in payment defaults. Industry experts predict that the negative effects of a CFPA would be even greater. There is a very real threat that retirees and other low- or fixed-income individuals will not be able to obtain credit.

The creation of a single banking regulator, as envisioned by Sen. Christopher Dodd, D-Conn., also could be a credit inhibitor.

The United States traditionally has been blessed with a wide range of specialized lending institutions, from the small home loan business run by Jimmy Stewart’s character in “It’s a Wonderful Life” all the way up to Wall Street titans.

Each type of institution served a segment of the public that it knew intimately. Each was overseen by a regulator that theoretically knew the niche it was regulating. The creation of a single “mega-regulator” removes the traditional know-your-customer ethic and replaces it with a strict, by-the-numbers rule book. The result is likely to be a crackdown on credit, making it much more difficult for small businesses to grow (damaging employment prospects) and for anyone to purchase or sell a home.

While the collapse of the economy clearly necessitates financial reforms, the current crop of proposals may do long-term harm to many of those they are intended to protect. The strong possibility that credit will flow less freely is particularly troublesome to those approaching retirement. Coupled with the housing supply’s overhang, restrictive credit will tend to lower home prices, decimating a major source of wealth for today’s and tomorrow’s retirees.

With housing weakened, defined-benefit pension plans becoming vestigial and companies cutting back on their matches to defined-contribution plans, the security of retirement income for many Americans is under attack. Even the Pension Benefit Guarantee Corp., created to in-sure private pension plans, has seen its portfolio of assets plunge in value. Couple the precariousness of pension income with the wealth-vaporizing effects of the market downturn, and we envision a much less rosy retirement for millions of baby boomers.

Unless they get significant inheritances from their own aging parents — who are living longer and consuming the wealth that so many once thought would flow endlessly — baby boomers will be forced to work longer to make up for the shortfall in other sources of income. And that certainly doesn’t bode well for the employment prospects of Generation X or Y.

For advisers working with near-retirees, the challenge will be to maximize income opportunities. Greater regulation may make financial markets secure, but it also may make earning a living in retirement a lot more difficult.

Richard M. Nummi is general counsel and a managing consultant at Accounting and Compliance International.

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Related Topics: ING Group, Retirement Watch