The New York Times published a politically-charged, fear-mongering article on the DOL’s Fiduciary Rule last week that I would normally ignore, except to my embarrassment associations that should be neutral when it comes to these clickbait articles chose to endorse it over social media.
According to The Times, delay of the rule is akin to forcing the public to retire in poverty and squalor, though that never happened to past generations which worked with advisors during times when costs were much, much higher.
The reality? Firms already were acting in their clients interest, the DOL gave exemptions to the rule to the worst firms in the financial services world (Equity Indexed Annuity providers, which the DOL said in the Federal Register are “important and beneficial” to retirement savers, a claim to serious advisor would make), and the rule is simply raising the costs to clients of advisors, while leaving advisors confused about how they can comply and service any client without millions in assets.
The Wall Street firms that The Times claims to have concern over wins no matter what (actually, Boston and Valley Forge may be more accurate). Fiduciary will eliminate their competition in the coming years as large fee-only firms attempt to absorb the smaller Wall Street firms, though they eventually will have their own issues with the rule since the government relies on ‘penalty’ fees today from financial institutions, and in the fantasy world of these large independent firms the large brokers and insurance companies will just ‘go away’ and government bureaucracies will give up those fees.
One academic seriously proposes that the market for insurance and investment products could be served by one or two firms. Clearly, these are not experts in freedom, entrepreneurship, wealth creation, or capitalism, those who are behind this rule.
It’s almost hysterical to consider, but sad to realize that these anti-capitalists are the people who had a hand in the fiduciary rule passage. And, they won’t stop until as The Times notes the rule is not only in place, but adequately controlling (minimizing) the market.
A reality that The Times fails to grasp is the same firms it claims will win without fiduciary are becoming a cartel forcing out competition because of it.
What’s interesting to me – as an advisor who has always accepted a fiduciary standard in my firm – is that the article takes a hard position for the rule, yet, like every other article, does not mention anything about the rule besides a talking point about protecting savers. Ever.
Because if they did, they would have to acknowledge that the massive costs they claim are going to “Wall Street” at the expense of savers are being paid for specific advice services that the clients choose. If The Times thinks those fees are high today, they fail to acknowledge that the billions that will be needed to comply will be added on to the regular investor’s advice tab going forward.
Rather, the article betrays that the rule must be “properly enforced” to work. According to the Times, proper enforcement “would prevent banks, brokerage firms and insurance companies from steering customers into overly expensive products and strategies when comparable lower-cost option[s] are available.”
There will never be 'proper enforcement' until the industry is minimized to a few large and connected firms. Financial advising - as I have always seen it - is mostly about reducing reliance on government safety nets and taking care of oneself. If that model succeeds and there are ways to avoid government regulated accounts and monopolies, as there was prior to the fiduciary rule, then that clearly is a threat to equality of outcome that is also frequently mentioned in the retirement account conversation. Independent fiduciaries may not recommend government bonds to the extent they have in the past if we have the threat of hyperinflation of the currency supply, but, if the market is controlled by a few than recommendations like this are harder to make.
This is how monopolies and cartels are created by government regulation.
And, this gets to the second lie of the fiduciary rule and what it is about.
That “tens of billions of dollars” comment is based upon a shoddy report from the economic advisors of the last administration. It seems to me most have not read the report, though it is written at a very low level for an official report.
The fee figure actually is not about higher costs without benefit. The fee is a made-up number to represent the 1% fee that may be an average paid to financial advisors for very valuable services. The comparison is to a 401(k) that the client received no advice to a holistic advisory service that the advisor is compensated for their work.
Another myth that The Times promotes is that fees are somehow equivalent to being a fiduciary. Tell any other profession that has a fiduciary standard - attorneys - that they must base their fees on the lowest fee on the market... the idea is ridiculous, but I've covered that concept already in past blogs.
This is why I have always believed the large 401(k) firms are not sad about the fiduciary rule passage. The main items financial advisors need to justify with the passage are why they are recommending rollovers to their firms, again, despite the need for advice from the end client.
A cost is ridiculous to look at without that context. Even fiduciary rule supporters admit that the lowest cost investment options in the lowest-cost 401(k) plan may actually reduce the returns of 401(k) investors by 1-2% per year based upon limited investment choice. Add in behavioral issues that impact many without advisors and the harm to a retirement plan can not even be expressed in percentages. Based on many cases I have come across it is higher than many can afford.
Trump administration advisor Gary Cohn had an unfortunate analogy that illustrates The New York Times’ position on the rule.
“This is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”
Of course if this was an appropriate analogy, one could understand the position of The Times. The advisor offering junk food is “conflicted” in their advice.
However, at issue isn’t the ‘food’ (investment selection) in any way, and giving fiduciary proponents that quote to suggest otherwise was a very poor attempt at explaining a complex issue in simple terms by Mr. Cohn.
What the fiduciary rule does is force consumers who were perfectly happy doing grocery shopping – where their local store supplied a menu of products and employees could help with product selection in a very low-cost environment – to hire personal chefs and shoppers.
The New York Times believes that by forcing personal chefs on all grocery shoppers that they will pay less than they did at the store.
Here in the Metro-Detroit area I lost my favorite local grocery chain due to its sale to a larger chain, and while I don’t have evidence, I have a theory certain increasing regulatory costs due to the slow introduction of the ACA played a large part. A few stores were shuttered, and the local community was left with fewer options for safe food and a store that cared about what their customers wanted.
This is exactly what is happening in the world of financial services due to the Fiduciary Rule. The delays and slow adaption is not preventing state regulators and firms to already have adapted; it is a sword hanging by a thread over businesses, we know it is going to fall.
Advisory firms are shuttering, removing products, and forcing clients who previously had very low-cost relationships with advisors. Firms that used to provide free advice now face significant risk for those services. Firms that had fee schedules based on meeting clients individual needs will be changing to schedules that are more uniform, ignore client needs, all of which will be higher. Other firms are dropping old products that paid very little to the advisor for one-time advice and ongoing support – a story not told by The New York Times – are being forced to choose a higher-cost service or lose that support.
One of the problems with the “proper enforcement” of the fiduciary rule is that advisors are confused as to what would create a conflict; since the rule is vague and arbitrary based on what a future enforcer deems what will have been appropriate in the past. Many are choosing new fee models that increase fees or choosing to stop providing advice and planning services they previously offered for free. I am hearing about states where new firms are being challenged for their fee level, despite it being lower than many market-based options.
There is no understanding at all of the simple concept that the consumer chooses the advisor and is the only judge of cost and benefit. The financial services field is “different” fiduciary rule supporters say, and it isn't the market and consumer choice that drives down cost and increases quality, it is the stronghand of government pushing profits down!
Though, this idea of the financial industry being “different” and requiring bending human nature to force the service provider to be the judge of value is actually not different than the grocery store / personal chef model. When every grocery store turns into personal chef services those who could not afford a personal chef before simply won’t eat.
And, intermediate results are not speaking to lower prices. Even robo-advisors are raising fees, and I expect them to further during the next downturn when lawsuits and phone calls overwhelm them. I can't for the life of me understand how these services that claim to be 'fiduciaries' allow investors to set and change their allocations on a daily basis, market skewed and unwise tax strategies, and recommend stock investment for shorter-term time horizons (and recommend emerging market bonds for any time horizon!). I've met and heard from several who have been moved from paying an advisor a 0.25% trail to a 1.25% 'advice' relationship.
The end result will be those same investment firms that The New York Times pretends will lose with this rule are gaining significant market share.
And, they are doing it in very anti-fiduciary ways. Some fund companies are now charging for ‘advice’ to buy their funds which is akin to having to pay Ford Motor to provide ‘advice’ on what car should be bought. Meanwhile, these firms offer the same product to investors in their balanced mutual funds often for free.
Talk about “conflicted advice”!
At the heart of the law is a simply an effort to stop consumers from working with independent financial advisors because there is a ‘cost’ to working with these advisors that The Times tries to pass on as ‘waste.’
There is no ‘excessive fee’ crisis. The market sees to fees being appropriate for services rendered. The New York Times and their hysteria over this make-believe issue is causing actual harm to investors as they have become so fee-conscious during a time when regulators are forcing billions of dollars of costs onto their relationship with their advisor that so many will lose their advisory relationship. Estimates on the cost to attempt to comply with the fiduciary rule (I say attempt because complying is arbitrary and not possible) are in the billons of dollars and many have it at over a thousand dollars per client.
If there is one sure way to put financial advice out of the reach of the ordinary American, it is this combination of hype over fees with no understanding of what those fees are and why ordinary and very intelligent people choose to pay them, and the push for increasing costs on those same clients to pay for regulation that adds no value to the advisor.
Which makes it interesting to see the sheer obsession with making sure this rule is implemented – without change, or thought - by The Times. Even the strongest advocates admit the rule could use many, many changes, but no mention of any changes by The Times.
The New York Times knows they have a strong political message that they are willing to put aside all of the negative consequences of the rule to make sure to have placed stake in the ground that if the rule changes people will lose their retirement, and we all know where they have already placed the blame.
It's too bad they don’t actually cover the impact of the rule on true fiduciary advisors who have a harder time reaching clients and robo-advisors and mutual fund firms that are abusing the rule for profit. But, when our financial associations don’t have the backbone to stand up for expanding actual fiduciary advice, why would the "news"?
PS Shame on NAPFA for using this politically charged article, which attacks financial advice rather than advances it, to promote their position on the fiduciary rule. While I find no valid reason for NAPFA to take the position they have except for leadership to benefit itself and NAPFA’s largest members at the cost of the small and more competitive firms that won’t be able to comply, the use of such a slanted article to pretend to promote fiduciary is an example of everything that’s wrong with the discourse of today’s political disagreements.