The Fiduciary Standard is Coming!

In 2011, the Securities and Exchange Commission published a study, mandated by the Dodd-Frank Act, which concluded that all financial advisers and stock brokers should be placed under “a uniform fiduciary standard.” Basically this meant that brokers and advisers would have an obligation to put the interests of clients first and must disclose any conflicts of interest that might compromise that duty.

Wall Street was none too happy about this. The industry spent tens of millions of dollars lobbying to prevent this standard from becoming the law of the land. Indeed, of all the regulatory reforms that have come out of Dodd-Frank, nothing seems to displease the financial industry more than the proposed fiduciary rules.

Although other reforms may be inconvenient and clunky, the proposed rules probably would cut Wall Street’s fees, potentially by a lot. This is a radical change from the current rules, which allow a universe of products, costs and behaviors that history teaches us are contrary to the client’s best interest.

The jousting over standards comes amid the awful results that investors have had in their tax-deferred retirement accounts. As too many studies have confirmed (see this and this), the typical 401(k) or individual retirement account investor barely earns 2 percent a year on their savings. In the years since the Employee Retirement Income Security Act (Erisa) rules went into effect in the 1970s, the average portfolio with a 60-40 split of stocks and bonds should have returned almost four times that much.

Although poor investor decisions are part of the problem — chasing hot money managers, jumping in and out of funds, trying to time the market — high fees associated with conflicted advice have also been a persistent drag on returns.


Originally : Brokers Who Work for Investors




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  1. bigsteve commented on Apr 20

    The fiscal hawks are not really fiscal conservative. They are about a certain class of people profiting off of the rules all slanted their way. And deficits do not trouble them at all. Which your article makes clear in an indirect way. I invest in a 457 plan and with very careful selection I manage to get my fee drag down to about 1.4% which is ridiculous. When I retire early next year that money is going to get rolled over into a IRA composed of low fee index funds most likely with Vanguard. It is cost me several thousand dollars in fees each year and opportunity cost as their are few index funds available. Unfortunately I learned late that I should of open my own IRA years ago and maxed it out and then invest the rest of the money in my 457 account.

    • willid3 commented on Apr 20

      and they really dont care about helping more that their 1% buddies. course its the same bunch that ended pensions. cause they couldnt get as much money from that as they could from 1000s of 401k accounts.

  2. rd commented on Apr 20

    Unfortunately, the big banks are probably just going to get the word “fiduciary” redefined to include “suitable” investments by paying their lobbyists something extra.

    ‘When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean—neither more nor less.’

    ‘The question is,’ said Alice, ‘whether you CAN make words mean so many different things.’

    ‘The question is,’ said Humpty Dumpty, ‘which is to be master—that’s all.’…..

    ‘That’s a great deal to make one word mean,’ Alice said in a thoughtful tone.

    ‘When I make a word do a lot of work like that,’ said Humpty Dumpty, ‘I always pay it extra.’

    ‘Oh!’ said Alice. She was too much puzzled to make any other remark.

    -Lewis Carroll – Through the Looking Glass

  3. DeDude commented on Apr 20

    Putting the interest of the clients first, not just on the advertisement material, but in reality?

    Are you trying to destroy the racket called Wall Street?

  4. Lyle commented on Apr 20

    Actually all this is saying is that folks should practice caveat emptor with respect to financial advice, in particular that advice you don’t pay directly for. Perhaps require a disclaimer “any advice I give you on where to invest may or may not be in your best interest, but is what I am expected to sell today” Of course this applies also to the financial community, how many advisers and investment managers bought junk before the crash for their clients, or could not see that the emperor did not have any clothes on.

  5. VennData commented on Apr 20

    American will go on fine without brokers skimming client’s

    Why are the GOP fighting this? They are nuts.

    • DeDude commented on Apr 21

      Why – because you lick the hand that feeds you.

  6. marketmap commented on Apr 20

    Maybe what needs to be defined is what the “standard” performance that is to be expected of an advisor . Will it be defined by : 1) what Jack Bogle thinks is necessary ( indexing to the SP500 or the World Index ) or 2 ) what the plain vanilla Efficient Market Hyp folks ( the many “Certified Financial Planners”, the Edelmans, Ferris, and folks running the Robo Advisories ) subscribe to / think is necessary ? Especially since 1 & 2 have stated beyond a shadow of a doubt that it’s impossible to produce alpha above 1& 2. And what if an advisor is a black sheep and may possibly have a solid alpha producing process, but doesn’t match the “standard” performance, as defined above, for a stretch of time …. can the client then sue the black sheep advisor for “underperforming” the standard performance and have the SEC clamp down on him / her?

    • rd commented on Apr 21

      My personal standard performance metric is Vanguard’s LifeStrategy Moderate Growth fund. It is a 60/40 fund that includes US stocks, a lesser amount of international stocks, US bonds, and some international bonds. Right now their Target Date 2015 and 2020 funds look a lot like it. It is available retail for any investor with over $3,000 has an expense ratio of less than 0.2%.

      I use a fund as a benchmark because it includes all of the trading frictions, commissions, and management expenses, so it is a valid head-to-head comparison with any investment out there. If an investment can’t beat that for risk-adjusted returns, then there is probably no reason to consider buying it. I use a diversified fund because most people should have significantly more diversification for their portfolio than the S&P 500 provides, and so the standard comparison with the S&P 500 is essentially irrelevant. Even though the individual components are cap-weighted, rebalancing inside it helps to reduce the impact of bubbles in any given market. It makes it a much more valid comparison in both bull and bear markets since its volatility is significantly less than the S&P 500, so your brain isn’t programmed to think manic-depressive.

  7. machinehead commented on Apr 21

    Finra is playing the same head-in-the-sand role as the tobacco industry did in the mid 20th century, when Big Tobacco decided to lie and stonewall about health risks, instead of acknowledging a problem and crafting a solution. This was a monumental strategic error.

    Preposterously, Finra claims that the ‘suitability’ standard is good for small investors, just as doctors used to recommend Chesterfield cigarettes in Life magazine in the 1950s.

    Barry Ritholtz has done us all a service by opposing Finra’s retrograde foot-dragging on behalf of its obsolete wirehouse business model. To the tar pits, you wheezing old dinosaurs!

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