Senator Elizabeth Warren wrote to the Acting Sectary of the Department of Labor last week, and repeated several myths about the DOL’s Fiduciary Rule that I may work my way through replying to.
I’ll start with the first sentence, and the largest lie in the Fiduciary Rule debate, “in April of 2016 the Obama administration finalized a rule to protect consumers saving for their retirement from predatory financial advisor conflicts of interest that were costing hardworking Americans more than $17 billion every year.”
Any financial advisor who repeats or supports this $17B claim I can’t be all that kind too, since I know investors find value in personalized financial advice. Therefore, I think advisors and advisor associations repeating this myth must either be self-loathing, not understand economics, don’t believe in their own benefits, or just want to signal their team affiliation and virtue by agreeing with the premise behind DOL's rule that advisors are a cost with no benefits.
In any case, they’ve failed to promote their benefit in the conversation because this poorly constructed myth of a $17B cost has been repeated for nearly 2 years by advisors, bureaucrats, and media alike.
The reality – there is no $17B cost today, and, even if there was, the actual additional costs of the DOL Rule which very likely will at least double this cost (to you and your clients, advisors!).
As I’ve written about – and hope to more once I re-read the report… it is agonizing as a college adjunct instructor to read terrible writing and logic I wouldn’t accept from my students – the $17B is a make-believe number.
Since the senator and the many financial advisors who believe the rule will help them are not away of how it is a made-up number, let’s just take a quick look.
Here is how they came to it:
The report pretends an investor’s 401(k) may earn 6.5%, and after subtracting a few made-up numbers that represent expenses of the plan, the government comes to a figure of a 6% return.
The report then pretends that the investor moves the funds to an advisor and earns the exact, same 6.5%! They increase the expenses, and, wouldn’t you know it, but… they get to a lower return of 5%.
Exactly 1% difference; which, I appreciate that they didn’t try all that hard to cover up the fact it was fake, advisors really shouldn’t quote it so much or back those who do.
This 1% is translated into $17B of an annual cost to American retirement investors, which, I won’t even pretend to insult your intelligence to describe what lengths are gone to to cook the numbers to get to this ‘conflicted advice’ cost.
As with everything government, the report provides no analysis of costs and benefits, it simply assumes everything is a cost without a benefit (which, is actually the opposite of what they're usually good at... telling you about all of the benefits they're going to give you for FREE!).
Here’s a blog I wrote about one of the lowest cost retirement plans – the government Thrift Savings Plan (TSP) – and how it rips off investors for millions over a lifetime by not allowing options to diversify.
The TSP would be a model investment plan for those who are for the fiduciary rule. I tell military members when I speak to them on their finances that it’s like MRE’s (meals ready to eat) – it’s dirt cheap and it will keep you alive, but you don’t want to use it alone.
A true fiduciary may not even recommend an investment in the TSP for some employees, since they are stuck with just a few options, and working with an advisor can add several ways they can at least cover the cost, but more likely benefit as well.
It should also be noted that investors who search for a financial advisor… aren’t getting the advice that they need. It’s safe to assume that said investor is not managing their portfolio. It's very safe to assume there is more of a cost to the investment returns given what we know about studies on investor returns trailing market-based investing.
Since that’s the case, we know there are the following benefits in working with an advisor (even a conflicted one):
Financial advice related to withdrawal and tax strategies (real strategies, not one’s like Betterment and other firms pretend have benefits like ‘tax-loss harvesting’).
Rebalancing – investors don’t typically rebalance.
Personalized asset allocation help – investors don’t typically have a personalized plan, and, if the do it is from a ‘conflicted’ 401(k) provider who does not often know 1/10 of what they need to in order to recommend a plan.
Asset choice – the fact that most 401(k) plans have a limited, and often bad, menu of funds means that an investor can actually diversify.
A real, human advisor who – again, unlike the robo-firms that the senator has held up as models – will be accountable for keeping the investor in the approved plan.
I won’t put all of the studies that provide some idea of the benefits here, but, for Senator Warren and the financial advisors who support her – many studies put these parts at much, much more than 1%.
And, since this is math I can do, let’s bring it to a conclusion.
If working with an advisor provides benefits >1%, and the potential harm is <1%... it sounds like Senator Warren should be making the case that investors should work with advisors.
If the senator wants ideas on how to expand this advice, and how to actually expand real fiduciary advice – not the fake fiduciaries that are popping up from mutual fund firms and robo-advisors – I’ve written about that too, and would gladly provide some ideas on instantly removing Wall Street’s control over retirement accounts, bringing a golden age of fiduciary advice to retirement investors, and actually lowering costs, as opposed to the increase that is coming in the DOL’s rule.
(I’m still waiting to understand how mutual fund firms like Vanguard being paid to sell their funds under an ‘advice’ model isn’t ‘conflicted advice.’ But, I don’t think an answer is coming from the senator.)
(I’m also still waiting to understand how online trading platforms that charge to implement trades and mislead investors about the benefits of “tax loss harvesting” - aka a scheme they say will increase returns by lowering taxes, but, being an Enrolled Agent and having worked in many CPA firms… no ‘true fiduciary’ would dare make the claims they seem to on their approach.)