On Monday, President Obama directed the Labor Department to force Wall Street advisers to treat you fairly, at least when it comes to advising you on your retirement money.
Not very controversial, right? Who could possibly object to people who make their living advising others to be required to do an honest job?
As it turns out, Wall Street objects. Yes, the same Wall Street that taxpayers bailed out when the economy collapsed. Some on Wall Street apparently don’t believe the advisers they employ should have to put your interests ahead of their own, and they’re prepared to fight to keep it from happening.
A battle that’s been going on for years
In 2010 I wrote a story called New Rule: Advisers Must Give Honest Advice. It was about a rule being proposed as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The language of the law basically would have required professional investment advisers to offer you honest, objective advice by adopting something called the fiduciary standard.
That part of the law, however, wasn’t included in the final bill. Instead, it directed the Securities and Exchange Commission to study the issue for six months, then act according to the results of its study.
Fast-forward five years: Nothing has happened. Investment advisers are still not required to put your interests ahead of their own. So yesterday the president stepped in and directed the Department of Labor, which oversees retirement accounts, to ensure that Main Street investors like you and me are at least getting a fair shake when it comes to our retirement accounts.
Here’s the beef
Most Wall Street advisers are not required to act as fiduciaries, meaning they are not required to place your financial interests ahead of their own. Instead, they adhere to a lesser standard of conduct, known as suitability. Suitability requires only that they suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.
An example to illustrate the distinction: Suppose your goals and risk tolerance suggest that a stock mutual fund is right for you. There are two similar funds available. One charges you a 5 percent commission, the other 2 percent. A fiduciary would be required by law to suggest the fund with the lower cost, because that’s obviously in your best interests. The suitability standard, on the other hand, allows advisers to suggest the fund that pays them the higher commission, because either fund is suitable.
The simple truth: A system built on commissions and without fiduciary standards invites abuse. That was true when I started as a stockbroker 34 years ago, and it’s true today.
How much is this costing you?
When advisers can legally advise you based on what they earn in commissions, that obviously makes them and their employer richer, but does so at your expense. How much does it cost? In a report released today, the White House Council of Economic Advisers suggested the cost was about 1 percent each year, or a total of $17 billion annually.
Who cares about a measly 1 percent? You’d better.Consider this example from the U.S. Department of Labor:
Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent.
In short, 1 percent over 35 years of retirement investing means your Wall Street adviser retires $64,000 richer and you retire $64,000 poorer.
And now for the funny part
When it comes to most arguments, there are two sides. This one? Not so much. How can anyone possibly argue against keeping advisers honest?
That’s the ridiculous position Wall Street finds itself in. Wall Street, along with its allies in Congress, now have to convince you that you don’t deserve to be dealt with fairly, even though you’re paying the bill.
Here’s a few examples of how they’re doing it.
Last year the House of Representatives passed an SEC budget with an amendment that prevented the SEC doing anything about requiring fiduciary duty. That effort ultimately didn’t get enough bipartisan support to pass.
Wall Street spokespeople are suggesting to the media that the more stringent standards will lead to vague, ominous-sounding outcomes. From this article in Reuters:
The proposal is opposed by many Republicans, financial firms and some Democrats who fear the plan will limit retirement products available to investors and severely curb brokers’ compensation.
Did they really just say that some in Congress object to offering unbiased advice because it would negatively impact advisers’ compensation?From Bloomberg:
Subjecting brokers to a fiduciary duty, a standard that now applies to professional money managers, will lead to more lawsuits against the industry and add burdensome compliance requirements, industry groups argue.
The added costs will probably prompt brokers to drop client accounts with less than $50,000 of assets, leaving those investors to manage their own savings, according to the Securities Industry and Financial Markets Association.
If advisers gave the best possible advice, it should result in fewer lawsuits, not more.
As for “added costs”: If an adviser doesn’t make enough money from $50,000 accounts because they’re unable to generate large enough commissions, I fail to see how the investor is worse off. They can either pay a unbiased fee-based adviser or do it themselves. It’s not rocket science. See Ask Stacy: Do I Need a Financial Adviser, or Can I Manage My Money Myself?
Wall Street is fighting. Coming soon? Your turn
The investment industry is powerful, it’s been fighting this rule for years and it’s not giving up.
From this article in Investment News from November 2014:
At the annual conference of the Securities Industry and Financial Markets Association [on] Monday, former SIFMA chairman Jim Rosenthal said group members had generated 100,000 emails to Congress over six weeks this year in opposition to the DOL rule. The group also had meetings with 39 lawmakers.
But Mr. Rosenthal said the organization has to become more active. He noted that 92 percent of SIFMA’s 537 member firms sat on the sidelines of the DOL opposition effort, fewer than 10 percent of member firms’ 270,000 financial advisers sent emails to Congress and none of the firms’ clients participated.
Rosenthal apparently expects clients, the people receiving potentially bad advice, to write Congress to promote something that would be against their own best interests. Got give him credit: He’s got a lot of nerve.
In coming months, you’ll have the opportunity to comment on this proposed rule. When the opportunity arises, seize it. In the meantime, educate yourself. This is one of those rare instances in which the other side is blatantly wrong, and one in which your voice can make a difference.
Watch the video below for basic guidelines to investing your retirement savings. You may decide you don’t really need an adviser.