Is retirement planning about to become more difficult?

Can a government regulation that limits choice and increases costs for an important service be good for consumers? The Department of Labor seems to think so, apparently subscribing to a novel economic perspective that the forces of supply and demand do not apply to the market for financial services.

{mosads}It recently proposed new regulations that would govern the fiduciary relationship between investors and the financial advisers they hire to provide advice on their individual retirement accounts (IRAs) and 401ks. The problem it wants to address is the potential conflict of interest between these two parties: investors, who have an interest in growing and protecting their nest eggs, and advisers, who, in addition to serving their clients, also have a vested interest in generating revenue and building their businesses.

On the surface, this may sound like a noble mission. However, what the Department of Labor overlooks is that financial advisers primarily build their businesses by doing right by their clients. This, in turn, boosts their clients’ wealth and helps attract new clients in a market where referrals remain the lifeblood for most practitioners.

There are cases in which less honorable advisers might focus less on growing investors’ wealth and instead simply arrange to take more of it. Fortunately, there is already a breadth of existing laws and regulations that weed out these bad actors (if their reputation for such perfidy doesn’t put them out of business first).

Nevertheless, rather than focusing on enforcement and holding advisers accountable under current laws, the government wants to create an entirely new and complex set of rules governing financial advice. Its so-called solution is to apply yet another fiduciary standard that would end up making it nearly impossible for advisers to recommend that clients invest in any kind of commission-based investment, regardless of the clients’ individual financial circumstances.

This one-size-fits-all mandate may very well lessen the incidences of investors putting their money into funds that are costly or inappropriate for their needs, but it will also severely limit individual choice and make it more expensive for most Americans to get professional financial advice — and so fewer Americans will avail themselves of the services of an adviser.

For an illustration of how this could play out, we need only to look at the United Kingdom, which implemented a similar regulation under the Retail Distribution Review rules of 2012.

A recent survey shows that the number of investors who receive financial advice in the wake of the new regulation declined dramatically, with 50 percent fewer investors getting advice from the U.K.’s two largest advice channels today than before the regulations took effect.

Labor Secretary Thomas Perez, citing a different study, declared that middle-class investors received more advice under the new rules. However, what Perez failed to note was that the same report indicated that the cost of advice increased and that the additional people who received financial advice were more affluent investors with “relatively higher levels of investable assets.”

For some people, simply investing in low-fee index funds or working with an adviser on a fee-only basis may be the best approach to managing their investments, but that isn’t true for every investor. And “going it alone” presents a whole new set of potential risks for the average investor, with the biggest risk being that the investor doesn’t actually bother investing, or leaves his wealth in his savings account, earning next to no interest.

There a lot of people who want professional advice, and — at least at present — a variety of options to reach their financial goals. Baby boomers today are making the transition into retirement and need help making key decisions that will affect their lifetime financial security. Most would benefit by working with an adviser to reach their financial goals.

Everyone can agree that advisers should put their clients’ interests first, that investors should have a clear understanding of the fees they pay and the compensation their advisers receive, and that regulators should continue to seek out and punish bad actors in every industry.

But the golden rule in any regulatory change should be first and foremost to do no harm, and the evidence that the benefits of a rule that will sever ties between millions of investors and their advisers outweigh the costs is underwhelming, especially given the U.K.’s experience with a similar rule.

Investing one’s savings is a monumentally important task, and one that many people feel more confident taking on in partnership with a professional. Altering market regulations in a way that would make financial advice more difficult for the middle class to obtain might strike a blow against commissions, but it is not clear that anyone’s going to be better off because of it.

Brannon is director of the Savings and Retirement Foundation.