Just in time for National Retirement Planning Week, the Department of Labor released its final rule about the fiduciary standard for professionals who service retirement savers. The rule change is likely to accelerate the current disruption to the industry, as fintech companies may become the beneficiaries of a mature industry’s reluctance to embrace a customer-focused approach to doing business.
Let’s take a step back: “Fiduciary” is a fancy way of saying that a financial professional must put your needs first and must pledge to disclose and manage any conflicts of interest that exist. For example, if an investment consultant, broker or insurance salesman recommends that you roll over your old retirement account into a new one, where you will pay higher costs than your old plan, she must document why it is in your best interest to do so and must tell you if she receives any compensation for the proposed investments within the new portfolio. Prior to the pending rule, many investment professionals were held to a lesser standard, called “suitability,” which means what they sold you had to be appropriate, though not necessarily in your best interest.
Maybe you’re thinking, “Who would argue that putting my interests first is a bad thing?” Well, over the past year, big financial firms have fought back against the DOL fiduciary standard, arguing that the new rules would make it prohibitively expensive to service smaller accounts. In fact, they spent millions of dollars lobbying lawmakers on this very point and were partially successful – the new rule went easier on the industry than the original iteration.
The final version allows big firms to continue to sell proprietary products, as well as variable and fixed rate annuities, as long as they let investors know what commissions they're charging. Of course that means that the customer is responsible for parsing through the disclosure documents and understanding that the broker may or may not have hosed him with the recommendation. Score one for the industry.
Another concession was that the government pushed back the effective date. But instead of being effective by year-end, some provisions are effective as of April 2017, and the rest will be set in stone as of Jan. 1, 2018. Ostensibly, that gives firms the time to prepare new documents, but it also gives the industry time to challenge the whole thing in court or to lobby a new political party to trash the whole thing.
Why has the industry push back so much on a concept that would put customers first? Because there is a ton of money at stake: according to the Investment Company Institute, as of the end of 2015, IRAs totaled $7.3 trillion and defined contribution plan assets, which are ripe for future rollovers, totaled $6.7 trillion. Under the old rules, the industry made a fortune from these accounts. Joshua Brown of Ritholtz Wealth Management notes, the industry has had “a long and profitable tradition of selling high-cost products of dubious quality to the investing public.”
Still, those companies that take the position that working in their clients’ best interest is not good business, may chose to push out smaller retirement account owners, but that’s good news for investors—if they don’t want to put you first, why work with them? Given the great strides in financial services technology, you may be better off with a financial service disrupter (aka “robo-advisor”) like Betterment, Wealthfront or Rebalance-IRA (all have embraced the fiduciary standard), than a conflicted salesman who is pushing a more expensive retirement product than you need.
One last note: when the industry whines about fiduciary, what they are really saying is that the new rules will hurt their profitability. As Vanguard founder Jack Bogle told the Financial Times, “if the wealth management industry loses $2.4 billion, investors are $2.4 billion better off. This is not complicated.”
MARKETS:
- DJIA: 17,577 down 1.2% on week, up 0.9% YTD
- S&P 500: 2047 down 1.2% on week, up 0.2% YTD
- NASDAQ: 4850 down 1.3% on week, down 3.1% YTD
- Russell 2000: 1097, down 1.8% on week, down 3.4% YTD
- 10-Year Treasury yield: 1.72% (from 1.88% a week ago)
- May Crude: $39.72, up 8% on week
- June Gold: $1,243.80, up 1.7% on week
- AAA Nat'l avg. for gallon of reg. gas: $2.04 (from $2.06 wk ago, $2.40 a year ago)
THE WEEK AHEAD: First quarter earnings season begins and according to Fact Set, the estimated year over year earnings decline for the S&P 500 is -9.1%. If so, it would mark the first time that there would have been four consecutive quarters of earnings declines since Q4 2008 through Q3 2009.
Mon 4/11:
Alcoa, Bids due for Yahoo’s core Internet and Asian businesses
Tues 4/12:
6:00 NFIB Small Bus Optimism
8:30 Import/Export Prices
Weds 4/13:
8:30 PPI
8:30 Retail Sales
10:00 Business Inventories
2:00 Fed Beige Book
Thursday 4/14:
Bank of America, BlackRock, Delta Air Lines, PNC Financial Services Group, Wells Fargo
8:30 CPI
Friday 4/15:
Citigroup, Charles Schwab
8:30 Empire State Manufacturing Index
10:00 ISM Manufacturing Index
9:15 Industrial Production
10:00 Consumer Sentiment
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