While the clear majority of financial advisers are honest and moral individuals, it appears we are set to protect those who are not. The fiduciary rule was set to establish standards that put a client’s retirement interests above those advising them. Keeping the status quo supports a mantle of credibility where none is deserved.
My Old Boss and Mentor Summed it Up Well
“Our ‘industry’ is a self-dealing, low standard entity always ready to blow. Without regs for behavior and accountability it will continue to operate at the lowest level.”
For over 30 years I have sought to deliver more transparency to my personal clients, and then to the clients of those I managed. I did this because it was both the right way to treat clients and it was in my best long term interests. At Goldman Sachs, we called this “long term greedy.” Misleading people is very bad business in the long run.
I can say this because I’ve managed people at every level of wealth and sophistication. I have managed individual and institutional businesses. I have managed brokerage, private banking, and fiduciary relationships. One of the largest Trust Departments in the US reported to me at the same time as one of the largest multi-family offices and asset managers—all outstanding fiduciaries to their clients. I know conflicts of interest in this area very well.
Every day unknowing and unsophisticated investors are being ripped off and the industry doesn’t care to stop it.
A financial advisor’s activities are not oriented to strictly an individual’s retirement accounts, for which the Fiduciary Rule applies. Mostly advisers provide more holistic advice helping piece together a plan for their clients’ future, which includes a retirement account. This is where the argument lies. The so-called ‘industry’ believes that what is deemed suitable for a client is far different than what is required when the client’s best interests are put first.
Investopedia describes the rub as:
“Now, financial professionals are legally obligated to put their client’s best interests first rather than simply finding suitable investments.” Really? Why are the objections so loud? The answer very simply is: enormous commissions that are undisclosed and do not serve the investor.
This Industry Knows Very Well, Compensation Drives Behavior
- Routinely an adviser will imbed a couple of points of hidden commission in a structured product for retail investors. I’ve seen this for years. Two points is quite low and deemed acceptable, but never disclosed. Frankly, clients never ask.
- Mutual fund classes are created specifically to maximize imbedded but opaque revenue for the “home team”. Few people read the fine print. They trust their adviser.
- Managers whip and drive their teams at month end without real regard for client performance to meet targets. The bad behavior you’ve seen in movies like Wall Street and The Wolf of Wall Street are just an exaggeration of what still happens today.
This is the Industry That Brought Us the Mortgage Crisis in 2008.
More recently we learned Wells Fargo routinely created fake client accounts to maximize cross-sell and hit revenue targets. Even the CEO of my alma mater Goldman Sachs, Lloyd Blankfein, showed a lack of self-awareness when declaring in 2009 (!) they were “…doing God’s work.”
Mind you, these activities are allowed if suitable. They are just not allowed if a client’s best interest need to be regarded. So, we are driving bad behavior.
Confused? Let Me Explain.
You see the leading objectors to the Fiduciary Rule are sleazy commission brokers and insurance companies. The former try to hide as many fees as they can. The latter manufacture structures so obtuse and ill-advised that no informed person would knowingly invest in them. I kid you not. I’ve seen this movie for too long.
Both actors are from a bygone era from which we should run, not walk. But they have lobbied and spread their ill-gotten riches to influence law makers with an enticing argument.
They say the extra costs for compliance will reduce the amount of good advice out there. This resonates because it has a very false pro-consumer ring to it.
The Cato Institute is known as a Libertarian think tank and they have picked up this reasoning. They think, “…It risks reducing access to advice and has an infantilizing view of American investors”. I call bullshit.
Most Investors are Naive, Emotional, and too Trusting
They mistakenly believe they can go toe to toe with corrupt industry players. But it’s not anywhere near a fair fight. Few too many individual investors are equipped with the analytical tools or knowledge needed.
More important is the first assertion that advice will be restricted, presumably because the big and wildly profitable wealth managers can’t possibly afford the compliance costs to enforce this higher standard.
This is a total lie because a whole industry of independent fee-only advisers is already making enormous strides to do the right thing for clients and act in their best interests. These are the industry’s thought leaders. But these guys and gals don’t work for the Cato Institute’s sleazy benefactors — the insurance companies and brokers who object.
In the same Wall Street Journal article they report that even Merrill Lynch will implement the tenets of Fiduciary Rule regardless of what the government does:
“Merrill Lynch, which has more than $2 trillion in client assets, has said it would end commission-based retirement accounts and charge a fee based on a percentage of assets even if the rule doesn’t survive.”
Maybe Merrill Lynch will and maybe they won’t, but we should still have this rule.
And let me be clear I am no fan of regulation. I believe firmly in what most people would call are Libertarian ideals. Let’s quickly axe the truly deserving and horrible regulations that limit American small and large businesses to compete and prosper, and many others.
I also don’t believe other types of investments need to be regulated if sold to suitable investors.
I believe that peer to peer lending is a very poor investment for most individual investors, but it should be allowed as an investment for suitable investors. I’m very suitable and I think it’s a complicated strategy that is beyond even the most sophisticated investors and a crummy asset class.
I believe that penny stocks, limited partnerships, and venture funding should allowed for people who are also ‘suitable’. Lend your brother-in-law money for a restaurant if you want to and you’re ‘suitable’.
What I don’t believe is that retirement assets should be subject to the low standards of the current regulations. This money should be sacrosanct. This isn’t play money.
Truly Good Industry Players Are Not Taking a Stand
They’re not making this the big deal that it is. This is what is so disappointing to me after my long career.
In America, we have a nightmare scenario of underfunded retirement accounts. The retirement income destruction all started with the transition from pension plans to 401(k) plans in the 1980’s. Individuals were bought off to fund their own retirements with a “corporate match” by employers that would vest over some short time frame, instead of a company provided pension. This was a bad trade for most individuals by all accounts. Now we have a huge retirement income problem on our hands.
Most folks in their 40’s and 50’s—those wildly underfunded in their retirement accounts- got a raw deal. They will pay for their poor decisions to trust conflicted and greedy advisers. They also don’t have a pension to fall back on. There is no joy for these folks nearing retirement age. Many will work past it and for as long as they can. They have no choice.
Future generations deserve to have a financial services industry supporting them as a top tier provider.
They should know with certainty they are dealing with advisers acting in their best interests. This should be akin to seeing a doctor or a lawyer, not some charlatan protected by a basically good industry.
The Most Basic First Steps Are Easy.
I implore everyone to vocally support the Fiduciary Rule. Only trust your investment assets—all of them—to advice from fee-only advisers or brokers who fully disclose all fees and conflicts. Even then, get a few opinions to even the playing field. Do this diligently and you will have created for yourself what the industry should be providing.
The Fiduciary Rule can help restore Americans’ retirement dreams for prudent future generations, but they still won’t have pensions guaranteeing retirement income. This is a massive first step in the right direction.
The Fiduciary Rule can also restore my pride in my industry as I near the end of my career.
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Ian Bond is a private banking senior executive with over three decades of experience in wealth and asset management with Goldman Sachs, Credit Suisse, and Citigroup. He has built major businesses on four continents.
Despite his professional responsibility for assets over $100B and revenues over $1B, after the 2008 crash Ian was personally going broke. Within five years he destroyed his debt, became an expat in 2014, and built multiple streams of income to fund his imminent retirement. Ian is also the founder of MyRetirementRehab.me created to help other executives and professionals rehabilitate their finances and make a prosperous, enduring retirement a reality.