On June 9, 2017, the Department of Labor’s Fiduciary Rule goes into effect. In short, it requires that anyone providing advice to tax-deferred or tax-free retirement accounts for a fee must put the investor’s interests before their own. While the rule falls short of what’s still necessary, it’s a long overdue step in the right direction for investors.
Specifically, I expect the rule will eventually reduce (not eliminate, unfortunately) the conflicts of interest out there as the newly required disclosure will shine a blinding light on some very egregious practices. It should also reduce costs as people become aware of the ridiculous fees they’ve been burdened with yet never knew (revenue sharing agreements, sales charges, high commission rates, and added costs from portfolio churn are but a few to pay attention to). Lastly, I expect investors will have a better investment menu before them as the worst products and strategies will evaporate once people see them for what they are – yes, fixed-index and variable annuities, I’m talking about you! When the salespeople have to justify a product’s costs to people who have the proper information in front of them, it will become obvious just how little value those products add. The worst of them will fade away and what should remain are fairly reasonable strategies that have a chance of helping retirement investors.
But as absolutely necessary as this rule is, there is a lot of money being spent trying to bury it. I’m actually surprised it’s going into effect on June 9, and its long term survival is far from certain. The main opponents of the rule are the brokerage and insurance industries, as they have vested interests in keeping the status quo. The rule will clearly impinge on how they do business, increasing their compliance costs, decreasing their profit margins, and exposing them to new legal liabilities. They’d much rather keep their respective worlds opaque, their clients ignorant, and their margins high. To do so, they are arguing that the new rule will increase investor costs, decrease or even eliminate access to advice for many, and reduce investor choices. While there may be a strain of twisted truth to some of their claims, investors win across the board. Costs will not increase relative to what investors currently pay unless investors are insensitive to price, but that’s not realistic. Access to advice won’t be denied to investors who want and need it, although perhaps it will in the brokerage industry, but who cares?! There will always be investment advisory firms willing to help, so I just can’t see that argument at all. And choices may be reduced, but only by those products and strategies that never should have been around in the first place. So don’t let their fear mongering sidetrack you from the truth.
The only complaints we should be hearing are 1) the rule doesn’t go far enough since it only covers retirement assets and 2) we should have had a fiduciary rule all along. The fact that some investment advisors aren’t upheld to a fiduciary standard across the investment universe is unconscionable (fact: every fee-based Registered Investment Advisory firm is held to a fiduciary standard in all aspects of what they do). But no sense crying over spilled milk. This is progress in the right direction, so we should cheer this development while working to get the SEC to expand the fiduciary standard across the board. The politics will be difficult, however…
Want more perspective on this and other important matters? Read John Bogle’s book, Enough. In it the Vanguard founder and former chairman shares his timeless insights on money/investing, business, and life. He packs a ton of great insights into a short but essential read.
As always, feel free to send any questions or comments directly to me at rlesan@frontieradvisorsllc.com. I’m happy to hear any feedback, good, bad, or otherwise, and I’m open to having my mind changed on this topic or any other.