Interesting concept - Fiduciary Standard for Brokers

[Clone]

On the surface it seems like a no-brainer to make sure that a financial advisor is held to a fiduciary standard.

So, the government decides to require the financial advisers to clean up there act, and do a better job for the clients.

Great protest and gnashing of teeth from those folks.

Step 2: Let's save the ignorant public from themselves (their own worst enemy). How about we require oversight of IRAs and similar by credentialed financial folks?

It would probably suddenly be supprted and publicized as a great thing! (By the financial folks.)

Government motto: Anything worth doing well can probably be done wrong...

 

[Rick_Head]

....................Nonetheless, financial advisors are required under FINRA regulations (Rule 2111) to make recommendations to the client, and place the client, in investments that are "suitable" for the client, given the client's risk profile which is generally documented by a standard risk tolerance form that the broker has you sign before you open up an account and is periodically re-submitted by the client.

................

In other words, if "suitable" means an index fund (say S&P 500) it's just as suitable to put the client in a fund with an MER of 3% and a trailer of 1.5% as using VTI.

The same thing is happening up here, north of 49. The MERs here can exceed 3%. The industry is crying about how "suitable" should suit the clients (they call it "the client's best interest"). After all, they can't just steal it.

 

[ReadySkiDaddy]

In England the fiduciary standard is the law.

"This re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers," said Ken Bentsen, president of the Securities Industry and Financial Markets Association, which represents banks and assets managers.

Of course non-fiduciaries are going to cry bloody murder. It will slash their paychecks because they won't be able to sell the expensive crap that they always push on clients. There's a reason why people want to be brokers (rather than fiduciaries). It's because brokers and other non fiduciaries MAKE MORE MONEY off of people. I sure hope Obama can pass this thing. The "suitability standard" is a joke.

 

[JoeWras]

I will say that when my father was suffering from early dementia, the fact he was seeking advice only from fiduciaries was a godsend.

This was all just pure luck, of course. It could have gone badly if he sought advice elsewhere.

 

[jIMOh]

I saw this article in the Christian Science Monitor today - How Obama wants to help protect retirement investors - CSMonitor.com. It seems the President is proposing that brokers who advise clients on retirement investments follow a fiduciary standard of putting the client's financial well being ahead of their own. Revolutionary!

My favorite part is the response from industry - In my opinion this is something that should have been required all along, and I don't expect too much argument from the denizens of this forum. But since this is a political plan I'm sure there are catches there somewhere. It would be interesting to hear what the legitimate (non-greed driven) reasons there might be to oppose it.

My understanding is this legislation is not new
the "new" fiduciary standard has exceptions and conditions

the problem is those of us which ARE fiduciaries know the only way to do it is to be a fiduciary full time with no exceptions.

FINRA and many other pieces of old legislation will need to be overturned or re-written.

For example, could an IPO ever be in someone's "best" interest? Yet a broker needs to solicit business for it.

I see exceptions everywhere, the best solution is just find an advisor which does not report through FINRA.

 

[travelover]

I will say that when my father was suffering from early dementia, the fact he was seeking advice only from fiduciaries was a godsend.

This was all just pure luck, of course. It could have gone badly if he sought advice elsewhere.

A friend of my late FIL got dementia and he was trading in his old car and buying a new car every month. I guess as long as the cars they sold him were "appropriate", the dealer was acting with integrity.

 

[ReadySkiDaddy]

A friend of my late FIL got dementia and he was trading in his old car and buying a new car every month. I guess as long as the cars they sold him were "appropriate", the dealer was acting with integrity.

85% of investment professionals in the US are not fiduciaries.

Three out of four U.S. investors mistakenly think that financial advisers at brokerage firms are required to put clients’ interests first.

The WORST are the small independent commission-based "advisers". They will sell you nothing but high commission crap.

 

[GTFan]

So, the government decides to require the financial advisers to clean up there act, and do a better job for the clients.

Great protest and gnashing of teeth from those folks.

Step 2: Let's save the ignorant public from themselves (their own worst enemy). How about we require oversight of IRAs and similar by credentialed financial folks?

In a perfect world we'd all be on the right side of the bell curve and/or have the bandwidth to understand complex financial matters, but we're not.

A 401k is a whole different animal than an IRA, both regulation and management-wise. And it is an almost universal replacement now for retirement savings, whereas the IRA is strictly optional and usually invested in by someone that knows what they're doing.

 

[timo2]

Laws and regulations never stopped anyone from doing anything, but they are handy for punishing the perpetrators. These rules would be good for throwing the book at some of the more criminal elements in the FA ranks.

 

[gcgang]

While they're at it, they should pass a law to hold politicians to a fiduciary standard.


Sent from my iPad using Early Retirement Forum

 

[Elbata]

Isn't fiduciary and financial adviser in the same sentence an oxymoron?

 

[harley]

Bumping an old thread:


I've been keeping an eye on this proposal to require fiduciary responsibility for FAs, and have been waiting to see how they screw it up. From this article, it sounds like the proposal may be overly broad regarding it's definition of compensation. How Fiduciary Rule May Censor Financial Broadcasters Like Dave Ramsey

“Under the proposed regulation, investment advice from a radio host to a caller regarding the caller’s own investment issues would appear to be fiduciary advice if the advice addresses specific investments,” Mason said in an email. It doesn’t matter that Ramsey and other hosts aren’t compensated by listeners, he adds, as the DOL rule explicitly covers those who give investment advice and receive compensation “from any source.” Mason agrees with Markey that the compensation Ramsey receives from radio stations that carry his show and from book sales are enough to define Ramsey as a “fiduciary” under the rule.

 

[jIMOh]

85% of investment professionals in the US are not fiduciaries.

Three out of four U.S. investors mistakenly think that financial advisers at brokerage firms are required to put clients’ interests first.

The WORST are the small independent commission-based "advisers". They will sell you nothing but high commission crap.

I heard the number is 98% are not full time fiduciaries.

 

[papadad111]

Saw that too. Stupid rule. John Q Public needs help and the rules intended at " protecting us ". are not gonna work.

 

[Sarah in SC]

Harley, from what I've read, the broad based advice of the kind offered by radio programs and typical investment newsletters are not included in the proposed standards. That's why they have the disclaimer on radio shows and printed in newsletters.

This is something I support, because I've seen way too many times that the average stock jockey does not even attempt to go a breath beyond bare suitability to come even near the fiduciary standards that I and other CFPs must uphold by nature of our certification.

Dave's safe! His advice in books and on his show is very general, though I imagine the reason he's hollering about this is because his much advertised Endorsed Local Providers would be held to that standard, and not be able to sell quite so many insurance policies as "investments".

 

[samclem]

The WORST are the small independent commission-based "advisers". They will sell you nothing but high commission crap.

The ones that inhabit local banks are right with them. Unsuspecting members of the public believe banks are safe, and the banks let these salesmen set up shop in the lobby so they can prey on these customers. Well, the bank gets their cut.

 

[lawman3966]

I have some experience with this topic, having helped set up the 401K plan at a former employer.
I recall there two standards in the industry: (a) the suitability standard for brokers; and (b) the "best interest of the client" for advisors.
The unannounced third standard is: managing investments yourself because you don't trust anyone else to do it, fiduciary or not. I like this third option the most.

This arises with 401K plans because the insurance company representatives who visit employer sites to sell 401K plans are paid by the insurance companies, not the investors, and therefore don't have to act in the best interests of the investors. An investor sued one such representative, and his defense was just that: he didn't have to observe the fiduciary standard, and therefore could not be liable for violating it.

While the suitability standard is a joke, I feel fairly strongly that the fiduciary standard is as well. One danger of the dispute over the fiduciary standard for brokers is that some people will inappropriately become complacent about the behavior of advisors simply because the fiduciary standard applies.

A friend of mine has a low 7-figure nest egg with a large financial firm which is managed under the fiduciary standard. The sum of the advisory fee and the ERs comes to 2% per year. Between the age of 25 and 65, a fee at this level reduces the final nest egg value by about 40% from what it would have been, had it been invested in low-fee index funds. The final payout will be reduced still further (by half in fact), if the adviser skims 2% of assets from a 4% withdrawal rate.
If an advisor, while in compliance with the fiduciary standard, can leave a client with about 1/3 of the retirement income that would have resulted from investing in index funds with a reasonable level of competence, and not paying fees, then the fiduciary standard is worth little if anything as I see it.

 

[papadad111]

I have some experience with this topic, having helped set up the 401K plan at a former employer.
I recall there two standards in the industry: (a) the suitability standard for brokers; and (b) the "best interest of the client" for advisors.
The unannounced third standard is: managing investments yourself because you don't trust anyone else to do it, fiduciary or not. I like this third option the most.

This arises with 401K plans because the insurance company representatives who visit employer sites to sell 401K plans are paid by the insurance companies, not the investors, and therefore don't have to act in the best interests of the investors. An investor sued one such representative, and his defense was just that: he didn't have to observe the fiduciary standard, and therefore could not be liable for violating it.

While the suitability standard is a joke, I feel fairly strongly that the fiduciary standard is as well. One danger of the dispute over the fiduciary standard for brokers is that some people will inappropriately become complacent about the behavior of advisors simply because the fiduciary standard applies.

A friend of mine has a low 7-figure nest egg with a large financial firm which is managed under the fiduciary standard. The sum of the advisory fee and the ERs comes to 2% per year. Between the age of 25 and 65, a fee at this level reduces the final nest egg value by about 40% from what it would have been, had it been invested in low-fee index funds. The final payout will be reduced still further (by half in fact), if the adviser skims 2% of assets from a 4% withdrawal rate.
If an advisor, while in compliance with the fiduciary standard, can leave a client with about 1/3 of the retirement income that would have resulted from investing in index funds with a reasonable level of competence, and not paying fees, then the fiduciary standard is worth little if anything as I see it.

That all presumes that the baseline is investing in index funds. On the other hand, someone too intimidated to move into stocks in the first place and instead "self- investing" in a 401k's "stable value" fund for 40 years is going to have self-invested and moved in reverse .... Try that as a baseline comparison and the advisor starts to look like a real help.

I think that is why companies now do the auto-enroll and put it into a life cycle fund typically .... Too many Unknowledgable investors in the past signed up for 401K but never even moved the money into proper equity or bond investments. It stayed in cash. Companies were being blamed for lack of fiduciary responsibility when putting people into their plan but initially directing to cash unless employee selected investments which many did not ever do...

So, For some, even the bank lobby advice is better than going it alone ...

In fairness, I find the over generalization of that industry is probably more right than wrong, though not at all surprising that there is a strong tilt toward "suspicion and industry greed" from this group who are independent/well educated / successful self directed investors. But this board is likely representing the top 5% - 10% of John Q. Public investors.

Just yesterday I had to explain to one of my mba students that a 401K is not an investment but an investment vehicle. She is super smart, but not familiar with all of the available retirement vehicles and so needs some hand holding ...