by Norbert Michel March 12, 2015

This story originally appeared here .

Last week the Obama administration announced it would move ahead with a new Department of Labor rule designed to provide uniform fiduciary rules for anyone providing retirement investment advice.

In general, a fiduciary standard requires financial advisers to put their individual clients interests above their own.

Sounds simple enough. But the new rule could impose a one-size fits all approach on a very diverse set of financial advisers, likely leading to many unintended consequences.

Wall Street vs. Main Street?

The White House is framing this issue as Wall Street vs. Main Street. The administration insists that too many financial advisers are selling products with backdoor payments and hidden fees because they are putting their own financial interests ahead of their clients interests.

The White House fact sheet states:

A system where Wall Street firms benefit from backdoor payments and hidden fees if they talk responsible Americans into buying bad retirement investmentswith high costs and low returnsinstead of recommending quality investments isnt fair. These conflicts of interest are costing middle class families and individuals billions of dollars every year.

According to the White House, the new fiduciary standard on investment advisers will eliminate these conflicts.

But the new ruleswhich, in fairness, have not yet been releasedrun the risk of making the situation worse.

Investment Advisers Are Already Regulated

Because of all the government rules and regulations governing financial advisers, there are several complex layers to this story.

First, there are actually four different sets of existing rules that govern what investment advisers can do: the Employee Retirement Income Security Act (ERISA ) of 1974 (enforced by the Department of Labor), broker-dealer and investment adviser rules enforced by the Securities and Exchange Commission (SEC ), broker-dealer rules enforced by the Financial Industry Regulatory Authority (FINRA ), and qualified plan rules enforced by the Internal Revenue Service (IRS ).

These different rules apply to different types of advisers because all advisers dont do exactly the same things. For instance, pension plan trustees have a fiduciary duty because its their job to protect the plan beneficiaries interest. Stockbrokers generally dont have a fiduciary duty because its their job to sell stocks.

While it sounds nice that the rules for all investment advisers should be uniform, its not at all clear forcing this standardization on the industry is necessary, and doing so could create a false sense of security for investors.

Disclosure vs. Regulation

Many people take care of their own Individual Retirement Accounts (IRAs) by buying shares in mutual funds. Do we really need to impose a fiduciary duty to investors on everyone selling these mutual funds?

Wouldnt a simple disclosure statement work here? In other words, the mutual fund company representative could simply acknowledge they are working for the mutual fund company and not the investor.

Many policymakers reject this disclosure idea because they dont trust people to judge for themselves whether they should seek advice from another advisor. This paternalistic attitude has become pervasive in our regulatory system but its the wrong approach.

It allows government to get overly involved in virtually every financial decision we make, an approach that has largely resulted in weaker financial markets.

It also leads to more opportunity for regulatory capture (meaning the government ends up helping the very industry its supposedly regulating) and cronyism, and ultimately moves markets away from the type of innovation that can help diversify risks. This approach seems destined to result in ordinary people being denied access to higher risk, higher return investmentswhether they want to take on those risks or not.

The White Houses Paternalistic Approach

Unfortunately, the paternalistic approach appears to be the favorite choice of the White House. Theyve released a survey of the literature that suggests conflicts of interests may be related to lower investment returns.

The main evidence cited, though, says very little about hidden fees, backdoor payments or ill-intentioned Wall Street firms. While the cited evidence does show a lower return among some groups of investments sold by conflicted parties, it does not show that these advisers systematically tricked responsible Americans into buying bad retirement investments.

The main problem with focusing on the lower return is that it ignores any intangible benefits the supposedly conflicted advisers provide. Perhaps investors like having someone to bounce ideas off of, or simply prefer to talk to someone rather than make purchases directly via the Internet.

In fact, one of the key research papers the White House cited as evidence of a major problem states that their results are consistent with two hypotheses: that brokers deliver substantial intangible benefits that we do not observe and that there are material conflicts of interest between brokers and their clients. Either way, lower returns are simply one additional factor to consider when investing, and they do not justify additional federal restrictions on financial markets.

Theres no doubt conflicts of interest arise in the financial industry, but the same can be said of many other professions as well. People dont seem to mind buying homes from real estate agents, for instance, even if the agent represents both buyer and seller. Disclosure is deemed sufficient.

Regardless, its not the governments job to protect people from every possible conflict that could arise. Governments legitimate role is to focus on prosecuting fraud and protecting property rights.

While its too early to tell exactly how good or bad the new proposal will be, rules and regulations that go beyond this basic principle of limited government go too far. It will be worth watching to see just how far the new rules go.