I recently received an email from Personal Capital’s CEO, Bill Harris regarding the two regulations that may be on their way out:
- Fiduciary Rule
- Dodd Frank legislation
The focus of this article is strictly on the Fiduciary Rule and why it makes sense to implement. See this article for more on the Dodd Frank legislation.
Bill Harris’ email on the Fiduciary Rule and the Dodd Frank legislation:
Quick Background on The Fiduciary Rule
The Fiduciary Rule is a ruling to set to be phased in April 10, 2017 – January 1, 2018. It basically will make all financial professionals who work with retirement plans a fiduciary.
A fiduciary is someone who has your best financial interest when recommending investments instead of someone who simply provides “suitable” investments. Suitable investments are those that the investment professional reasonably believes are suitable to clients.
For example, it’s not suitable to trade excessively in a client’s account. It is, however, “suitable” to put your clients in mutual funds that have 2% fees as well as front load fees. It’s also “suitable” to sell fee-laden complex-contract annuities to your clients.
I have it out for any investment professional who isn’t acting as a fiduciary to their clients.
I don’t care what the law says about suitability; it’s just plain wrong and immoral to recommend investment products that are better for the broker’s wallet than your wallet.
Example of Investment Professional Not Following The Fiduciary Rule
I just spoke with a friend after she met with her broker to discuss where she could put some of her capital that is sitting in cash. The broker told her she needed to be in six different American Funds mutual funds.
I looked into this for her. One of the funds has the following expenses:
Expense Ratio – 0.81%
Annual Management Fee – 0.39%
Other Expenses – 0.19%
Service 12b-1 Fee – 0.23%
That’s a total of 1.62% in expenses and the fund may actually lose money and has a very high chance of not performing as well as the benchmark.
The person my friend went to wasn’t her fiduciary (obviously). He was a broker trying to sell her mutual funds, which apparently are a “suitable” investment, so that he could earn a commission. He didn’t even tell her that he earned a commission from selling mutual funds.
I call BS. Brokers and insurance salesmen need to be called out on this every chance possible.
Investing can be risky enough. You shouldn’t be ripped off while you’re trying to make your hard earned money grow a little bit.
The Importance of the Fiduciary Rule
Managing people’s retirement funds is an incredible responsibility; one that should include being a fiduciary and having the client’s interest above financial professional’s.
All financial professionals who currently work with retirement plans or who provide retirement planning advice will automatically become fiduciaries if the Fiduciary Rule goes into place in April 2017.
This is great news for people who have worked their entire lives and want to avoid being ripped when it comes to their investments.
Not so great news if you’re a broker hawking overpriced mutual funds or insurance salesman conning people into high fee annuities.
A Disappearing Act
Look what happened to the Fiduciary Rule fact sheet on the Department of Labor’s website:
It disappeared! Someone over at the Department of Labor took it down.
But now there’s confusion as to whether the White House intends to scrap the Fiduciary Rule or not. The only thing that we can be sure of at this point is that the Fiduciary Rule is still up in the air.
Fiduciary Rule Conclusion
Not having the Fiduciary Rule will have a negative impact on not only retirees, but all people in the accumulation phase of their lives. It’s hard enough for people to save money for retirement as it is. They have to continually worry about being ripped off by brokers and insurance salesmen.
It makes zero sense in today’s investing world to pay in excess of 1% total fees on a mutual fund. People who make a commission off of selling them should be put out of business. Why not just get an index fund or target-date fund from a low cost provider like Vanguard? I have a complete list of retirement tools for those who do not want to be ripped off.
No one stands to gain if the Fiduciary Rule doesn’t go into effect except for the brokers, insurance salesmen, and the companies for whom they work.
Investment professionals should have the best interest of their clients in mind when recommending products. There should be no vague “suitability” standard. The choice is black and white; it’s the difference between right and wrong.