The Department of Labor is trying again. This week, a proposed new rule, backed by the president, would force all financial advisors to adopt a “fiduciary responsibility” towards their clients when overseeing retirement plans. If passed, it could substantially reduce the fees and expenses we pay for that advice.
So exactly what is this fiduciary responsibility that President Obama is championing? The rule would require all advisors to put their client’s interests above all other considerations when making investment recommendations on accounts covered under the Employee Retirement Income Security Act. That means the bulk of middle class savings represented by all types of IRAs, 401 (k)s, 403 (B)s, pensions, et al. would finally be protected from the present practices of gouging Americans through investing them in high-priced, low-return investment vehicles.
“But I thought that was already the law,” said a New York client, on hearing the news.
Actually it is not. Unless you work with a registered investment advisor, most financial advisors on Wall Street are simply required to suggest products that are “suitable” to investors. In practical terms, all that means is that a broker can’t put your uninformed, 92-year-old granny into a foreign penny stock that fluctuates 10% or so on a daily basis. Anything else is fair game and the industry has taken advantage of that suitability rule to rake in billions over the years from you and me.
It is estimated that over the course of 25 years of saving for retirement, the average investor will pay one third of his/her assets in fees and expenses. The White House Council of Economic Advisors estimates that these conflicts of interest cost the investor 1%, or about $17 billion, per year.
These legal (but less than moral) practices of the financial community have been a pet peeve of mine for years. In my columns, I have repeatedly written about these pitfalls and how my readers could avoid them. Back in 2010, when the Department of Labor suggested this rule, Wall Street, the GOP and the SEC successfully shot down the proposal arguing that a tougher fiduciary standard would prove so costly that small investors would not be able to afford investment advice at all. I say, why pay for investment advice that only enriches the broker that gives it to you in the first place?
I’m not saying that everyone in the financial sector who is not a fiduciary is a bad guy, because they are not. It is the system that is at fault. The early eighties saw the end of an era of fixed commissions for Wall Street brokers. Since then the way brokers managed to earn a living was to acquire as many clients as possible, while making as much money as one legally could through fees, commissions and revenue-sharing kickbacks from other vendors like mutual funds, insurance companies and annuities.
The Fiduciary rule would change that model substantially and it would be expensive to implement and oversee. One’s compliance department, like my own, would need to oversee that rule and insure that client’s interests were always placed above the company and individual’s interests. It is certainly doable. My company has a fiduciary responsibility to our clients and enjoys a good bottom line while fulfilling the letter and the spirit of that rule.
Wall Street, in my opinion, could fulfill a fiduciary obligation and still make money—just not as much. The quality of personnel that interface with clients would have to improve and many lucrative relationships with their existing vendors would have to change as brokers pursued the best investments possible at the lowest costs. I, for one, believe this rule is long, long overdue. It’s about time the government and the White House put their money where their mouth is when it comes to the little guy.