February 29, 2016
The Financial Industry’s fight against the Fiduciary rule continues
I’ve been commenting recently about the Financial Service Industry’s fight against the fiduciary standard. Many of you know that I consider this to be one of the biggest and most important issues facing investors. I want to address the arguments the industry is spinning to try to derail the fiduciary standard.
Industry Spin #1 – The Fiduciary Standard is “unworkable” in the current Broker/Dealer environment.
The industry argues that the fiduciary standard won’t work, that Broker/Dealers and their representatives won’t be able to operate under the fiduciary standard.
That may be true, but the good thing is that for decades firms just like Gainplan have been operating successfully within the guidelines of the fiduciary standard (under the Investment Advisors Act of 1940 and ERISA). In fact, there are over 11,400 investment advisor firms, managing over $67 trillion in assets, that operate under the fiduciary standard today for 30 million large and small investors.
Not only is it workable, it’s sustainable, and better for clients! Just ask Mark Egan, Economics Professor from the University of Chicago, who states, “Holding brokers to a fiduciary standard over the period of 2008 – 2012 would have increased investor returns by as much as 2.73% per annum.” I can only imagine that much of that performance difference is related to commissions and added fees.
Industry Spin #2 – They argue that “best interest advice” (fiduciary standard) and “suitable advice” (suitability standard) are two different names for the same thing.
If that were true, the industry would not spend the $$$ it is spending to stave off the fiduciary standard rules. They would simply agree and comply with the fiduciary standard. Yet, the industry knows that if the fiduciary standard is enacted brokers will no longer be able to peddle more expensive products to investors to receive the higher compensation. Putting their client’s interests before their own will eliminate this inherent conflict of interest.
Will this put some Brokers (and Broker/Dealers) out of business? Probably. Will they be replaced by a new breed of investment professionals dedicated to the rights of the investor? Absolutely. The financial services industry is growing by leaps and bounds every year. Financial complexity grows annually. Professionals trained to assist clients in circumnavigating these tumultuous waters will continue to be in demand. They will just have to put their client’s interests before their own.
Industry Spin #3 – They claim that smaller investors will be neglected.
The industry argues that implementing the fiduciary rule will push brokers out of the smaller markets, leaving smaller investors to either fend for themselves or pay higher fees for advice. I agree partially with this argument. Smaller investors (and the industry doesn’t really quantify what a small investor is, so I’m taking a few liberties here) might actually have to research their options or pay a fee to a professional for advice. This is rational, and the good news is that some in the industry are rushing out low cost solutions to address this need. For example, Vanguard provides a host of low cost solutions built entirely for the smaller investor.
Where the argument falls flat for me is that it suggests that costs for financial service solutions for these smaller investors will go up. I don’t buy that argument. Today, under the suitability rules, smaller investors can be fleeced with hidden costs buried inside financial products that lack transparency. Just because a smaller investor doesn’t know they are paying excessive costs now doesn’t make it less true. As an investor I would much rather know what my costs are up front for hiring a professional vs. being misled by hidden transaction fees, yearly surrender charges, or buried hidden internal expenses.
This writing has run long, and anyone that has lasted this long deserves a bonus. Let me leave you with one last piece of information: Over a period of 30 years just 2% in extra costs per year cuts a retirement investor’s nest egg 30%. The upfront fees and commissions that investors pay for a broker add up, big time!
The bottom line is, in the financial services industry, the clients should always come first. It’s time for Congress and the entire financial industry to embrace the fiduciary rule.
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