Many people may say, “I don’t have any investments. This doesn’t affect me.”
Well, not exactly.
Most people aren’t financial experts. If you don’t have investments now, you hopefully will be saving money for retirement in the future. (If you plan to live on Social Security, well, the only way Social Security covers retirement living costs today is if you move out of the US to a lower cost country like Costa Rica. How’s your Spanish?)
Even if you’re counting on winning the lottery to cover you old age or breaking the house in Vegas, there will be times when you’ll need financial advice. It may be about where to put your money, or whether to buy or rent, or how to finance a home or car. Almost everyone has something on which they need financial advice. You’re probably no exception.
That’s why understanding the idea of “fiduciary” and who is and who isn’t is important.
How do you know you’re getting the best advice? How do you know you’re getting good advice? How do you know the person you are asking for advice has the knowledge to help you and isn’t lying to you for his own profit? Who’s responsible for keeping him (or her) honest?
It’s a problem. Remember Bernie Madoff and all the harm he did? A lot of money simply disappeared. And he wasn’t the first.
Most fraud doesn’t involve Ponzi schemes (what Madoff did). A more typical scenario is: “Investment X is better for this client than investment Y, but I get $100 for selling X and $200 for selling Y, so I’ll recommend Y to him.” The advisor gets a little more money; the client gets an inferior product. Will it make a huge difference for the client? Maybe, maybe not. Is it the right way to do business? No.
In fact, the Feds think that people are giving $17 billion in “excess fees” to retirement advisors now.
Giving sales people incentives to sell specific products is common throughout retail, not just something that happens with investments. How about the person who sold you a home theater set-up? Or your computer system?
“Spiffs” are bonuses paid to retail salespeople for selling a specific product. The term isn’t usually applied to financial products, although the underlying idea is relevant. Companies run competitions with potentially significant awards based on sales volume.
The Department of Labor (DOL) Fiduciary Rule is simple: it requires retirement advisors to act as fiduciaries. That is, they must place client interests ahead of their own profit motives. To me, that’s the way advisors should behave, all the time. It shouldn’t require a regulation to make it so.
Fiduciary (legal term): An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.
The problem with the DOL rule is the general problem with government regulation. The government enforces rules through
- Licensing requirements for sales people
- Regulation of investment companies, and
- Surprise inspections and tedious paperwork.
The extra bookkeeping and storage involved in the latter adds to overhead cost for the advisor.
In the Medicare insurance sector, salespeople have to keep records of every sales call for ten years and be able to produce those records for inspection when asked. Think about what that means.
My problems with the DOL rule are:
- Can’t we find a better a more efficient and effective approach to enforcement?
- We should impose the rule on all forms of financial advisor, not just investment and retirement advisors. That means including bankers, insurance agents, credit union managers, tax advisors, etc. Anyone who can affect your finances should be covered by the rule.
What you need to know:
- The fiduciary rule as now written doesn’t apply to everyone from whom you may see advice on financial decisions. Buyer beware.
- One guide to consider: Is the advisor open about what they earn from the different products they sell? Are they willing to recommend products they don’t sell? Are they willing to explain the reasons for their recommendations to you in plain English?
- Eversheds Sutherland. http://www.dolfiduciaryrule.com/
- Investopedia, “DOL Fiduciary Rule Explained as of May 23, 2017.” http://www.investopedia.com/updates/dol-fiduciary-rule/
- Li Skinner, “Figuring Out Fiduciary,” Investment News, 9 May 2017. http://www.investmentnews.com/article/20160509/FEATURE/160509939/the-dol-fiduciary-rule-will-forever-change-financial-advice-and-the
- Federal Register, 8 April 2016, v. 81, no. 68, Part V. Department of Labor, Employee Benefits Security Administration, “Definition of the Term ‘Fiduciary’; Conflict of Interest Rule — Retirement Investment Advice.”
- Heidi Shierholz and Ben Zipperer, “Here is what’s at stake with the conflict of interest (‘fiduciary’) rule,” Economic Policy Institute, 30 May 2017. http://www.epi.org/publication/here-is-whats-at-stake-with-the-conflict-of-interest-fiduciary-rule/?utm_source=Economic+Policy+Institute&utm_campaign=8817421bab-EMAIL_CAMPAIGN_2017_06_02&utm_medium=email&utm_term=0_e7c5826c50-8817421bab-58834721&mc_cid=8817421bab&mc_eid=0541ad0f29