The government says that ‘conflicted’ financial advice costs Americans… $17 BILLION DOLLARS… (“muahahaha” laughs the financial advisor)…
This number is in the press frequently as though it is a fact, and it was the basis for the DOL to pass a rule to ‘protect’ retirement investments from financial advisors, who I think the DOL must see we advisors in the image of Dr. Evil.
Where did this number come from?
Some report from the office of the President. Sh!
But, wait, where really did the number come from?
Knock, knock.
Who's there?
Sh!
No, I’d really like to know… where did the number come from?
Having read the report, it’s meant to be the cost that consumers pay to financial advisors to provide them advice. At least, that’s the best I could tell. I’m really not sure though because it appears to me that they just made it up.
No way! Did they really just make it up?
The details of the report are quite inconsequential… very well, where do I begin?
Those who prepared the report certainly didn’t contact individuals to see what they received for that advice. The report makes up a few costs that they think a 401(k) may cost (which, is made up and not representative of your 401(k)), they then use some numbers that show what investments in an IRA may cost, and the difference is… the cost that consumers choose to pay for financial advice.
Consumers aren’t dumb. If they pay for advice, it’s because they value advice. There are benefits to the costs that they may pay.
If rollovers cost investors 1% on average, then studies like those by Vanguard and Morningstar actually show the benefits of financial advice far outweigh this cost. So, rollovers to an IRA where financial advisors can provide clients with the advice they are seeking for retirement, tax, and financial planning actually makes them $17B better off… at least!
(And, if the government really wanted to solve the retirement funding problem they could start by forcing 401(k) providers to allow consumers to have access to their accounts during employment so that they can access the advice that they need… just think about all of the billions and trillions of dollars of benefits that would be added to the retirement balance sheets of investors!)
Here’s an actual way the government could end conflicted advice… first, don’t offer exemptions to rules to certain segments of advisors, like Equity Indexed Annuity EIA salespersons to any future laws, as they tried to with the fiduciary rule, and as they’ve done in the past by protecting them from registering with securities regulators.
Next, force EIA providers to give clients a simple sheet that says:
This product does not guarantee any return.
The past history of all of our clients in this formula has been a return of x% (my guess is this is 3-4%, even though clients always tell me EIA salespersons tell them they can earn 6-12%).
This product may pay less income than other products that may be safer (I would add the word substantially less income).
By purchasing this product, the agent will earn $50,000 (assuming a 10% commission on $500,000).
The reason this is necessary is every client I’ve spoken to after a pitch or sale instantly regrets the purchase and feels they were told an 'untruth' about the product. They often made a poor choice based on greed, fear and lies that they will regret for the 10-15 years before the surrender penalties end.
Why am I so forceful about EIAs? The product that guarantees what prospects I’ve spoken to are told by EIA salespersons doesn’t exist. If it did, I would recommend it. And, I would be far wealthier selling EIAs than I am as a fiduciary.
I estimate if we used my sheet that investors would not invest with EIA providers, and they would put themselves in a much better position by working with a true fiduciary advisor who offered them far more ways to secure their retirement income… I’m going to say that the number that investors would benefit is… well, I don’t like to make up numbers, but it’s probably really, really large.
Why make it billions when we can make it… millions?
(Wait a minute… Equity Indexed Annuity EIA salespersons and the government both lied to make a sale? I’m just realizing why they get along so well).
