What changes are needed in the financial advice business?
After spending two days volunteering to give personal financial advice in connection with NAPFA’s ‘Your Money Bus’ Tour, I’ve spent some time thinking about the current mess of financial scandals, proposed legislation, and commentary from SROs, Congresspersons, and industry groups as alleged solutions to our problems.
Should the CFP Board be the next regulator? Are target-date mutual funds in 401(k) plans too risky? What about retirement plan fee disclosure? Or the need for index-based fund options in plans?
Just like in the past, the ‘answers’ government and industry groups are pursuing tend to address their own current concerns rather than the underlying problem. RIA backed groups are concerned about being regulated by the financial product cartel; so they propose regulating themselves. Congress is concerned about the lack of response to problems it caused in the monopolistic and ‘computer-based’ advice rules it passed, which left out the ability for independent advisors to give unbiased advice on money saved to retirement plans.
The real problem I see everywhere is lack of financial literacy and consumer education. Sure, many of these groups have points we should consider. The real problem is individuals do not have the basic skills to judge for themselves the options available, and the knowledge to know when they are being given a sales pitch versus individual advice that pertains to their situation.
So what is the solution? Do we simply allow the same industries that sell the plans to a group to educate the participants, when their interests conflict with full disclosure to their clients?
How about simply opening up dollars that belong to individuals within retirement accounts to pay for unbiased financial education without paying a withdrawal or tax penalty?
The mass of American’s savings for retirement rests in their 401(k), 403(b), and 457 accounts. It is clear that the problem with current education comes from lack of financial literacy choices to the participants. If 401(k) providers were mandated to allow for fee-payments to independent financial advisors that provided this education, there would a movement toward comprehensive financial literacy in a heartbeat; both from new entrants in the independent advice business, and the desire for the 401(k) provider to offer more comprehensive advice to retain assets.
Status quo and patchwork legislative and industry proposals are maintaining the problem, not proposing a solution. The message I received from individuals this week was loud and clear – they need more information from unbiased providers to make appropriate decisions, and when their savings are held hostage by fund and insurance companies, they lack the ability to pay for this important advice. Many, due to not receiving needed advice from their retirement plan provider, have maintained their own status-quo, when what they needed was simply advice that understood their personal situation, and positioned their assets accordingly.