Why legally financial advisors can sell you the ‘Grown Ups 2’ of retirement plans.
Let’s talk about a new feature we would like to call I Thought They Already Did That? In this installment we’re focusing on financial advisors. Or as you may know them as, Phil. You know, your financial advisor that called you during dinner in 2008 and started to loudly sob over the phone as he told you your retirement plan had disappeared.
Recently the Obama administration announced that they would be pursuing legislation in which they would change how financial advisors give advice to their clients. Under the Department of Labor, the Obama administration hopes to put new rules into a bill that would include stopping aggressive marketing of IRAs (Individual Retirement Arrangements) and require financial advisors to work in their best interest.
Now after reading that, if you’re thinking to yourself, “shouldn’t my financial advisor be doing that already?” Well, I think maybe you should watch this video put out from the Department of Labor…
You see financial advisors currently work under, what in the industry calls, the suitability standard. This means when a financial advisor makes a recommendation to their client, they have to make sure that the product they are pushing is “suitable” to their client’s needs. While all this sounds great in theory, there are major conflicts of interest that occur. As the video states, under the current rules, financial advisors can lead individuals to plans that while “suitable” aren’t necessarily the best for them. So it’s not uncommon for advisors to lead clients to plans that help their own bottom lines – through commissions or backdoor payments – but isn’t the absolute best option available for their client.
Think of it as dipping a glass into Lake Michigan to get drinking water. Sure there might be the stench of chemical run-off and dead bodies, also there’s a good chance you’ll come into contact with E.coli after drinking it, but you can’t tell me it isn’t “suitable” for anyone that is literally dying of thirst!
Or it’s like getting a pizza at Little Caesars. Sure for five dollars you can walk in and get a “suitable” large peperoni pizza, but you know what else is also “suitable”? LITERALLY ANYTHING ELSE!!! Because you and I both know if that pizza isn’t ready the moment you walk in, you’re walking out and using your cell phone to call Dominos for pick-up!
And that’s the thing. Suitable in this case doesn’t necessarily mean in your best interest. So that’s why the Obama administration wants to enforce the idea of fiduciary duty on brokers and other financial advisors. This in turn would make financial advisors act only in the best interest of their clients. The White House estimates that due to conflicting advice from financial advisors, low and middle-income workers have lost altogether a potential $17 billion each year in their retirement savings! Plus with more workers getting off pension systems and moving their retirement plans to IRAs and 401Ks, these rule changes just make sense.
So who in the right mind would be against this initiative?
When the Obama administration proposed these new rule changes late last month, many organizations that represented the interest of investment companies started to chime in. First you had the Securities Industry and Financial Markets Association (SIFMA) in which their President and Chief-Executive stated that, “this re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers.” Another national association called Investment Company Institute (ICI) – who lobbies for investment companies – echoed similar sentiments in their Viewpoints Section on their website recommending that “fiduciary status should not apply where a reasonable person would not believe a position of trust and confidence exists.”
While their main points for fighting against the standard of fiduciary duty is technically correct, it still doesn’t make the most sense or even the one that looks after their client’s best interests. It would be like your friend, a movie buff, complaining that he couldn’t recommend ‘Grown Ups 2’ when asked to give a recommendation on Netflix! While true your friend not being able to recommend ‘Grown Ups 2’ does limit someone’s options when choosing a movie, but I think we all can agree that no one should be watching ‘Grown Ups 2’ because it is the Little Caesars of movies!
What’s even crazier is this isn’t the first time the Obama administration actually tried and set these rules. Back in 2010, the Obama administration tried to enact similar guidelines, but were met with opposition from various financial institutions including tech-companies from Silicon Valley – where financial models were created under the standards of current regulations – and of course various investment firms. It was later killed in 2011 after much industry pushback.
Now of course this shouldn’t be a surprise to no one. Financial institutions have lobbied against less and, as stated before, changing from the suitability standard to a fiduciary duty would cost these organizations billions each year.
So for a moment, let’s return to Phil and his Dawson-esqe phone call to you back in 2008. All of a sudden Phil’s anguish makes a lot more sense. Because granted while you did lose almost all of your retirement nest egg, Phil here had to sell that beautiful beach house in the Virgin Islands and settle for one in the Florida Keys like some god damn commoner! So even though you’ll now be working into your 70’s, Phil here will have to make the greatest sacrifice of all; being denied the amenities of a private beach!
Let it all out Phil, let it all out…
(Photo Credit: Department of Labor, Google Images, Amazon.com)