There’s a scary series of ads on broadcast and cable television lately that warn us that the federal government is about to make it more expensive to get financial planning, make it impossible for people to use the trusted financial planner who has helped them reach their financial goals for years, and may even leave people with phone robots as their only source of investment advice.
The two ads I saw focus on two distinct demographic groups: One ad describes a conversation a couple have in the car ride home after dropping a child off at college. It seems as if the only thing threatening their financial future is a nebulous action the government is about to take. The other spot is a pained soliloquy of a minority small business owner—in the construction industry—who is worried what the impact of this unexplained government action will be on his ability to provide his employees with 401K plans. The call to action in each spot is to contact Congress and ask it to “fix this now.” Of course the ads never define what “this” is, instead focusing on what the speakers predict are the dire consequences of “this.”
The ads do a good job of raising anxiety and anger levels—anxiety about your financial future and anger at the government for making ominous if undescribed changes to the law.
Both spots drive viewers to Securefamily.org, which describes the “this”: “new retirement regulations from the Department of Labor.” Throughout the website, we learn about the consequences of the new retirement regulations, but we never learn what the regulations are or do.
That’s because, counter to what the Securefamily.org campaign may say, the new Labor Department retirement rules do not raise fees, mandate robo-advisors, nor of necessity make it harder to have a financial advisor or offer a retirement plan to employees.
What the new regulations, which have not yet been finalized, will do is make anyone providing financial advice for a retirement account to become a “fiduciary” of the client. Fiduciary is an odd- and corporate-sounding word about which thousands of books and article have been written. But the basic meaning of fiduciary is quite simple: A fiduciary must act in the best financial of the client.
That’s right. Under current law, registered financial advisors and others giving investment advice do not necessarily have to act in the best interest of their clients. They are free to recommend buying a stock to accommodate a larger client who wants to sell or to unload a large purchase their brokerage house just made. They are free to recommend mutual fund A over mutual fund B, if A gives the advisor a bigger commission and B is better for the client. They are free to sell fee-based accounts to clients who hardly trade and would save money if they switched to a commission-based account. As a fiduciary of the client, all these common actions would expose the investment advisor to a lawsuit.
The new rules would require advisors offering individualized recommendations to sign a contract detailing their fiduciary responsibilities. The advisor would also have to provide extensive information about fees and expenses and follow specific procedures to minimize conflicts of interest. Under the new regulations, individuals and businesses will have new rights to sue advisors for breach of fiduciary responsibility.
Who in the world could be opposed to making financial advisors fiduciaries, and therefore responsible for acting in the best interests of the client? How could acting in the clients’ best interests hurt the public?
The twisted, almost pathological reasoning of those opposed to the new regulations is that the cost of financial advice will rise, pricing many Americans out of the market for financial planners.
Let’s consider the ways in which the new regulations might lead to higher prices: Investment companies might get sued more often for not putting the client’s interest first, which would raise insurance costs. Or many advisors—the less competent ones to be sure—may get out of the business, unable to make a good living anymore because they won’t be able to steer their clients into more expensive options for the same basic investment; with fewer advisors out there, the cost of advice could go up. On the other hand, service will improve as advisors become both more competent and less conflicted, which should lead to fewer lawsuits and better returns in the long run. I’m thinking a good analogy is seatbelts: the industry said they would make the cost of new cars prohibitive, but they added very little cost while making automobiles much, much safer. No one was priced out of the market.
Some opponents also say that disclosure and record-keeping under the new regulations might be so extensive that it would make it too expensive to give advice to investors who aren’t wealthy. LOL! It will only take a few months for the industry to develop software that automates disclosure, just as it has automated financial planning for virtually everyone not a millionaire. That’s the “robo-advisors” the ads warn you about, except the ads don’t tell you that many current financial advisors do nothing more than follow the recommendations of the software already. I don’t think the new regulations will dissuade the investment industry from continuing the “live robo” strategy of having human financial planners present the results of a software analysis.
I’m sure few readers are wondering who is financing this war against making investment advisors responsible for acting in their client’s best interest. We all know it’s the insurance and investment industry. The SecureFamily.org website, TV commercials and other campaign elements are financed by Americans to Protect Family Security, which describes itself as “a partnership of America’s financial advisors, life insurance agents, and life insurance companies that is dedicated to educating policymakers about the role our products play in the financial lives of 75 million American families.”
The financial industry has every right to fight regulations that will make it harder to make money, even if their position hurts the very clients they are supposed to serve. We see organizations advocating selfish positions all the time—automobile manufacturers arguing against higher fuel standards; coal companies and heavy manufacturers arguing against environmental regulations; Republican politicians arguing in favor of laws that restrict the right to vote.
What’s particularly horrifying is when the organizations lie or mislead. Talking about the hypothetical impact of a new regulation without telling us what the regulation does is as misleading as quoting weather personalities who don’t believe in global warming or creating nonexistent problems such as voter fraud. For the investment industry, this duplicitous approach is likely to backfire. The organization is acting deviously to oppose a new regulation that makes it harder for the industry it represents to act deviously. It seems as if all the Americans to Protect Family Security campaign is doing is showing just how necessary the regulations it opposes are.