03 Feb 2017 New Trump Executive Orders Have the Financial Services Industry Cheering
Today Mr. Trump signed an order that will dismantle or reduce a Labor Department rule introduced a year ago that holds brokers and insurance agents who work with retirement savings to a higher standard, known as the fiduciary standard. It requires financial professionals to work in the best interests of their clients, avoiding as many conflicts as possible and to clearly disclose any conflicts that do exist.
Unfortunately, what sounds like a given for the way financial services should be delivered is actually a far cry from what actually happens in much of the industry. Brokers, Insurance agents, and bankers are governed by what is known as a suitability standard. It requires only that recommendations made to clients be suitable for them. There is absolutely nothing in this standard that prevents a broker or agent from selling a product that provides the best compensation for him or for his firm without regard to its relative merits for his client. The rule only requires that the product be suitable.
While the DOL rule that was to become binding in 2018 may not have been perfect, it was certainly headed in the right direction. Today’s WSJ quoted the Obama administration’s argument for the rule, saying “conflicted advice costs American families $17 billion a year and pushes down annual returns on retirement savings by a percentage point (we believe they are closer to 2%). Many financial-industry leaders have said those figures are inflated and have fought against the regulation. Consultancy AT Kearney projected that the rule would result in as much as $20 billion in lost revenue for the industry, about 7% of total revenue in 2015.” My 34 years’ experience in the industry put me with Mr. Obama on this one!
Here’s another revealing quote from the same article. “The insurance industry has also bucked against the rule, as it would effectively put out of business certain annuities sellers. Chip Anderson, executive director for the National Association for Fixed Annuities, a trade association, said more than 50% of the annuities industry would be “severely affected,” with potentially half of the industry’s jobs at stake. The association and other critics have contended that the Labor Department overstepped its authority in crafting the regulation and that it would have an “immediate and devastating effect” on its industry.” We can only hope.
We have seen countless cases of clients’ lifestyles being demonstrably and significantly eroded by fat fees and incomplete or wrong-headed advice, which leads to material under-performance and costly behavioral mistakes. Here’s a real-life example of what just a 1% reduction in market returns can do to lifestyle.
A 43-year old couple with $400,000 in savings today, investing $14,400 each into their 401Ks until age 60 in a 60% equity portfolio confidently expects to do everything they hope during their lifetimes and still leave $520,000 to their children (in today’s dollars!). But reduce their returns by an additional 1%, and just like that, the children’s inheritance is completely wiped out. That’s half a million dollars they would never know existed without a plan tested against real-world threats. There are simply too many examples to share here of how a self-serving financial services industry can quietly, often unintentionally, steel your lifestyle.
The Trump administration, has said it will study and likely re-write the rule, leaving the industry in the air for a time, but the trend looks to be in the industry’s favor. But despite today’s executive action, some companies will continue to trend toward reducing conflicts. Merrill Lynch plans to continue their plans to no longer offer commission-based retirement plans. The WSJ reports that Bank of America “has enacted a host of other changes, including simpler monthly account statements that more plainly state the fees investors pay and a slimming down of investment products offered by brokers. Other brokerages such as Morgan Stanley, Wells Fargo, and LPL Financial hadn’t taken the drastic step of eliminating commissions as an option for retirement savers, choosing to offer both. But other changes ahead of the rule’s previously planned implementation deadline are moving ahead.
Unfortunately, the name “Advisor” has been watered down by our industry to offer little guidance to clients. It can be used by people selling and people advising without distinction. You might be hard pressed to know whether you are being served by someone who is governed by the suitability or the fiduciary standards. You should ask for clarification and you should clearly understand all the conflicts of interest your representative or advisor has in working with you, especially the fees and expenses you are paying – ALL of them.
Beacon Wealthcare is a Registered Investment Advisor. Our advisors are legally referred to as investment advisors and we serve our clients as fiduciaries. To keep conflicts to an absolute minimum, we sell no products and we plainly and completely disclose the costs of our process, including our fee, the internal cost of the assets we manage, and the commissions charged on the securities traded at our custodian, which in no way benefit Beacon.
We hope that the Trump Administration will see fit to compel the financial services industry to put their $17 billion clients’ interests ahead of their own $20 billion with a strong fiduciary rule. We see almost every day the lifestyle cost to real families of sticking with the industry status quo.