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Thursday, April 7, 2016

Are You Getting the Right Kind of Investment Advice ? the US Government Indicates That Very Likely is Not the Case

After a long period of discussion…and despite the opposition of the lobbyists for much of the financial services industry. the US Department of Labor will be announcing new regulations for financial advice. The new rules will require all advisors including stockbrokers and insurance agents to give advice based on a fiduciary standard as opposed to the current requirement of suitability:
The fiduciary standard is already the required standard for Registered Investment Advisors (like us) As the WSJ notes
…. the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.
Of course this a welcome development and will no doubt improve the level of advice given to many investors. Nevertheless, several points merit pointing out:
·         The requirements only apply to IRA accounts not to all investment accounts. Those with non IRA accounts will find that their broker is still held only to the lower “suitability “standard. It is unclear to me what happens to a client that has both IRA and taxable accounts. The reason the new rules don’t apply to all investment accounts is because the rules are from the Department of Labor which only has responsibility for retirement accounts. Other investment accounts would come under the purview of the SEC which is tied up in a partisan divide and unable to agree on new rules 
·         The new rules don’t “grandfather in” existing investments. This would leave things in the strange situation where advisors are held to the new fiduciary standard for new investments are under no obligation to explain to clients that their existing investments while “suitable” (the current standard) don’t meet their best interests (the fiduciary interest). I’m not quite sure how that would work in practice but clearly it is not the optimal situation for investors.

·         The rules won’t take effect until spring of 2017 at the earliest.
Never underestimate the lobbying power of the financial services industry. The WSJ reported they were able to get some last minute watering down of the new rules...with a puzzling explanation of he changes by Secretary of Labor Perez: (my bold)

Wall Street breathed a sigh of relief Wednesday when the industry finally got a look at the Obama administration’s new retirement-advice regulation, discovering some onerous requirements floated earlier had been scaled back.
A broad coalition of financial firms, trade groups, and Republican politicians, joined by a handful of Democrats, spent the past year mounting a fierce counterattack to the Labor Department rule promising to shake up the $14 trillion in assets parked in 401(k)s and individual retirement accounts….
The Labor Department also retreated from language that would have explicitly favored low-cost investments and declared instead that an adviser isn’t required to recommend the lowest-fee option if another product might be better for a client. “The Yugo may be the lowest priced car, but it isn’t a very good car,” Mr. Perez told reporters in explaining one of the changes

I think any objective person looking at the choice of an index fund or ETF with fees as low as .05% as analogous to a Yugo…seems Yugo’s no longer exist because they truly “weren’t a very good car” and investors voted with their wallets and walked away from them/. On the other hand, trillions have flowed into index funds and ETFs from both institutional and individual investors (including some of those proprietary mutual funds). It’s difficult to believe they have all invested in the equivalent of a Yugo (and continue to pour money into these funds) bypassing proprietary funds which would have better met their needs.

It’s hard to believe that the changes that were made based on the lobbying of the financial services industry are to the benefit of investors.

All of this begs the question: Why work with a broker who will only be held to the fiduciary standard (with the exceptions listed above) on their IRA accounts, may still work with a firm with proprietary funds(and the potential conflicts of interest involved in those), and who will only be held to those standards at the earliest a year from now…..instead of working now with an independent Registered Investment Advisor already held to a fiduciary standard for all his client accounts that has no proprietary products connected with his firm ? our firm.

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