Faced with a dizzying array of financial decisions, Americans turn to financial professionals for help. But rather than treat their clients like a doctor would a patient, many brokers look at customers like sheep to be sheared. People are steered into high-priced investments that line brokers’ pocketbooks at their clients’ expense.
The fiduciary rule — a requirement that financial advisers act in their clients’ best interests — should not be controversial. It’s not just the right thing to do. It’s what the best advisers are already doing and where the financial services industry has been heading, slowly but inexorably, for years.
Wall Street may think it scored a victory by delaying the Department of Labor’s fiduciary rule, which would have required advisers to put clients’ interests ahead of their own when giving advice about retirement savings. In reality, the delay is just causing confusion and more expense as companies try to guess what might happen next.
The financial services industry, like any other business, will find ways to make money. What companies need is for the rules to stop swinging wildly from administration to administration. For that to happen, Wall Street needs to table its usual rhetoric about regulations reducing consumer choice and work with regulators to ensure a sensible standard applies to all advisers.
In doing so, the financial services industry would be moving with the tide of history, rather than trying to fight it. For years, money has been moving out of commission-based investment accounts toward fee-based accounts as investors and advisers recognized the serious conflicts of interest commissions pose. Since 2008, those who hold the gold standard credential for financial advice — the certified financial planner designation — have been required to act as fiduciaries when giving financial planning advice. Adviser groups such as the National Association of Personal Financial Advisors have long used their members’ adherence to a fiduciary standard as a key differentiator that helps attract clients.
The truth is that a consumer-first approach makes great business sense. If you do the right thing for consumers, you build trust. Consumers who trust you will come back and do business with you, again and again.
Contrast that with the approach too frequently used by financial services companies selling them products with hidden fees, excessive commissions and poorly performing “house brand” investments that badly trail their benchmarks.
Advisers may be paid more or given bonuses for steering people into these more expensive investments when cheaper ones are readily available. One mutual fund, for example, may have as many as 18 share classes with different fees for each class. Since each class invests in the same pool of assets, that means different investors get different results. A do-it-yourself investor who picks the retail version of a mutual fund may pay just a 0.5 percent annual expense fee, while the investor who uses an adviser could pay a 5.75 percent upfront sales charge, a 0.94 percent annual expense fee and an additional 0.25 percent marketing fee.
An investor in the cheaper shares would see an initial $10,000 investment grow to almost $70,000 over 30 years, assuming a 7 percent average annual return. An investor in the pricier shares would net closer to $54,000.
Good advice and the human touch can definitely add value for investors. But it’s hard to imagine advice so good that it justifies a $16,000 difference in outcomes.
The problem isn’t trivial, and it’s pervasive. The previous administration’s White House Council of Economic Advisers reported that conflicted advice costs retirement savers approximately $17 billion a year.
Mere disclosure, by the way, isn’t enough to protect consumers. It’s too easy to bury people in fine print and to confuse them about which conflicts really matter. Disclosure is no substitute for actually requiring advisers to act in their clients’ best interests.
The Securities and Exchange Commission is reportedly working on its own version of the fiduciary rule. The SEC is in the best position to craft such standards, since it regulates brokers and has broad jurisdiction over investment accounts.
When the SEC’s proposal is unveiled, the financial services industry needs to rein in the army of lawyers and lobbyists it has used to spread fear, uncertainty and doubt about the impact of such rules. Instead, the industry should focus its energy and considerable resources on implementing smart, consumer-first rules as quickly as possible.
Tim Chen, who sits on the Consumer Advisory Board of the Consumer Financial Protection Bureau, is CEO of NerdWallet, which offers financial tools and objective advice to help people understand financial products and make the most informed decisions.
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