DOL Fiduciary: Putting Retirement Investors First
Tensions are rising in the financial services industry, as the Department of Labor gets ready to release its final rule about the fiduciary standard for professionals who service retirement savers. The rule change is intended to crack down on “backdoor payments and hidden fees,” which cost retirement savers up to $17 billion a year in excess fees and adverse performance, according the President’s Council of Economic Advisers. “Fiduciary” is a fancy way of saying that a financial professional must put your needs first and must pledge to disclose and manage any conflicts of interest that exist. For example, if an investment consultant, broker or insurance salesman recommends that you roll over your old retirement account into a new one, where you will pay higher costs than your old plan, she must document why it is in your best interest to do so and must tell you if she receives any compensation for the investments within the new portfolio. Prior to the pending rule, many investment professionals were held to a lesser standard, called “suitability,” which means what they sold you had to be appropriate, though not necessarily in your best interest.
Maybe you’re thinking, “Who would argue that putting my interests first is a bad thing?” Well, over the past year, big financial firms have fought back against the DOL fiduciary standard, arguing that the new rules would make it prohibitively expensive to service smaller accounts. In fact, they have spent millions of dollars lobbying lawmakers on this very point and have been partially successful - that’s why Speaker of the House Paul Ryan came out against the rule.
Why are they pushing back so much? Because there is a ton of money at stake: according to the Investment Company Institute, as of the end of 2015, IRAs totaled $7.3 trillion and defined contribution plan assets, which are ripe for future rollovers, totaled $6.7 trillion. Under the old rules, the industry made a fortune from these accounts. Joshua Brown of Ritholtz Wealth Management notes, the industry has had “a long and profitable tradition of selling high-cost products of dubious quality to the investing public…Insurance companies, broker-dealers, mutual fund companies, and other backers of the status quo will not go down without a fight.”
And fight they have...the Securities Industry and Financial Markets Association, the lobbying arm of the financial world, said “This proposal would lead to a number of negative consequences for individual investors.” But Ray Ferrara, the CEO of ProVise Management and former chair of the CFP Board, said in his testimony before DOL, “the argument that this rule will diminish the availability of services to middle class Americans is simply not credible.” Adding to Ray’s argument: LPL Financial Holdings recently announced that it would lower, not raise fees for smaller accounts.
Still, those companies that take the position that working in their clients’ best interest is not good business, may chose to push out smaller retirement account owners, but that’s good news for investors—if they don’t want to put you first, why work with them? Given the great strides in financial services technology, you are probably better off with robo-advisors like Betterment, Wealthfront or Rebalance-IRA (all have embraced the fiduciary standard), than a conflicted salesman who is pushing a more expensive retirement product than you need.
When the industry whines about fiduciary, what they are really saying is that the new rules will hurt their profitability. As Vanguard founder Jack Bogle told the Financial Times, “if the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated.”