Bloomberg's Ben Steverman (@bsteverman) wrote
a depressing, but brutally honest, story
about the state of financial advice in the United States in the lead up to today's stunted soft rollout of the
Department of Labor's Fiduciary Rule. It's a thorough article that I highly recommend reading in full, but here are a few sections I thought to be especially pertinent to my readers:
Many financial advisers just don’t care what’s best for you. But with an industry awash in misconduct, the bigger issue may be that they aren’t required to care.
You’d be forgiven for assuming your relationship with a financial adviser carries the same sort of solemnity as, say, attorney and client or doctor and patient. An attorney is bound to zealously represent you; a doctor pledges to do no harm. So why aren’t financial advisers subject to the same duty? Well, the economics of the industry—fees, commissions, quotas—can end up standing in the way.
The Fiduciary Rule, finalized under Obama and originally set to take effect earlier this year, seeks to cure this disconnect. All advisers were to be required to put clients first when handling retirement accounts, where the bulk of everyday Americans’ savings reside. But then Donald Trump won the election, and on his 15th day in office, the Republican president ordered the Department of Labor to reconsider the rule. His advisers echoed Wall Street arguments that tying the hands of advisers would limit investor choices, raise the cost of financial advice, and trigger a wave of litigation.
This Friday [June 9, 2017], the rule will take partial effect. Its future, though, remains deep in doubt. Many Republicans in Congress oppose it, and Labor Secretary Alexander Acosta has suggested that at the very least it be revised. Then last week, Trump’s newly appointed chairman of the Securities and Exchange Commission, Wall Street lawyer Jay Clayton, announced his agency would also seek comment on the topic, a process that could further threaten the rule’s survival.
The Trump administration and its DOL appointees did everything in their power to kill the Obama-era DOL Fiduciary Rule, including delaying its April 10, 2017 start date, but the Administrative Procedure Act left it no legal basis to delay its start any further — the Fiduciary Rule officially begins today. Kind of.
The DOL has actually pushed true enforcement of the Rule out to January 1, 2018. So long as the advice giver is "working diligently and in good faith to comply with the fiduciary duty rule and exemptions," the DOL will not pursue claims against those fiduciaries nor treat those fiduciaries as being in violation of the fiduciary duty rule and exemptions [DOL Field Assistance Bulletin No. 2017-02]. The DOL, led by Trump-appointed Secretary Alexander Acosta, will continue to "actively engage in a careful analysis" of the Rule — code for "working to dismantle" the Rule.
We suspect that come January 1, 2018, the Fiduciary Rule will look very different from the one we know now, with changes benefitting large broker-dealers at the expense of retail investors.
If fees were more transparent, it would be easier to shop around, and more obvious whether your broker’s advice is worth what it costs. Also, with a duty to put client interests first, advisers could get sued for recommending the most egregious investments. That puts pressure on insurance companies and mutual fund companies to come up with better products that appeal to advisers on their own merits, creating a virtuous circle. “Product issuers are going to be forced to compete on product quality,” [University of Minnesota's] Egan said.
But those hopes smacked into a wall on Nov. 8. “The Fiduciary Rule as written may not align with President Trump’s deregulatory goals,” Acosta, Trump’s labor secretary, wrote in an Op-Ed [paywall]. “This administration presumes that Americans can be trusted to decide for themselves what is best for them.”
Advocates for investors are worried that the Trump administration is getting ready to gut the Fiduciary Rule. Now that the SEC is weighing in, a big concern is that both agencies will team up to create a new, weaker rule that allows brokers to call themselves fiduciaries with “no meaningful protections to investors,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “That would arguably be worse for investors than the status quo.”
Though while Wall Street lobbyists fight the Fiduciary Rule, some individual advisers say they embrace it. “The image of the investment professional who always prospers—whether the client sinks or swims—has got to change,” said Paul Smith, chief executive of the CFA Institute, which represents 142,000 investment professionals worldwide, including an estimated 13,000 client-facing financial advisers in the U.S. and Canada.
So what's the big deal here? Well, conflicted advice delivered by the country's financial advice givers leads to "large and economically meaningful costs for Americans’ retirement savings." That was the finding of an Obama-era White House Council of Economic Advisers analysis. On the $1.7 trillion in IRA assets of the time, the analysis estimated that the aggregate annual cost of conflicted advice was about $17 billion annually — 1% of their accounts. But this is just the beginning of the impact of conflicted advice on Americans' net worth. As the author of this story, Steverman, points out, IRAs make up just an eighth of the $56 trillion in financial wealth Americans control, according to the Boston Consulting Group.
These are big numbers that are hard to comprehend, or map to one's own situation. That's why Steverman included an example for a hypothetical individual who starts saving modestly from scratch at age 23, showing how much they would end up with at age 80 under three different investment fee scenarios, assuming the same gross (before fees) investment performance. The difference between low cost and high cost can be easily reach seven figures. That's the big deal.
Source: Bloomberg
But if the Fiduciary Rule is weakened or killed, much of the pressure for better financial advice may dissipate. Well-educated investors can usually find ways to get high-quality advice, but the more vulnerable will continue to lose out. And all advisers—even the most trustworthy ones—will remain under suspicion of being salespeople, not professionals.
So what is a retail investor needing professional help to do in regulatory framework which does not require financial advice givers to act in your best interest? Here's my short list:
- Seek out a firm that is a Registered Investment Adviser (RIA) for your investment advice. RIAs are fiduciaries (i.e. they are required by law to act in your best interest or to disclose any conflicts of interest) for both retirement and non-retirement accounts, unlike brokers. Within this firm, an advisor with more experience, more education, and more meaningful credentials (e.g. CFA, CFP, CPA) is preferred to one with less of these three qualities.
- Educate yourself in the many ways investment fees can be charged so that you can calculate for yourself how much you are paying. I recently wrote a blog about how to do this: 5 Step to Learn How Much You Pay in Investment Fees.
- Don't be afraid to ask your prospective financial broker or adviser how they are paid, and by whom. What is typical breakdown between base and bonus and what are the drivers of his or her bonus? Understand their incentives.
- And remaining on the topic of incentives, ask your prospective financial broker or adviser where they invest their own money. Are they recommending an investment vehicle to you that is significantly different from the one they use?
- Use BrokerCheck to research the background and experience of prospective investment firms and their financial brokers and/or advisers.