Chuck Jaffe: Brokerages don’t want to put your interests first
By Chuck Jaffe, MarketWatch
The art of politics may be most visible in delaying important decision-making until it is no longer relevant.
That’s the point we are reaching with the fiduciary rule — a standard that would require financial advisers of all stripes to put the best interests of their customers first — as it has gotten stuck in a legislative abyss that, by now, has swallowed up much of its potential impact.
Truthfully, the entire process is insulting to consumers, and the only reason that Congress, the Department of Labor and the Securities and Exchange Commission can get away with it is simple: The market has been running at record-high levels and isn’t showing signs of cracking.
At this point, the best consumers can hope for is that the rules finally change to a common-sense standard once there is a significant market downturn to motivate the politicians.
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Until then — when it will be too late to help the people most adversely affected by the problem — the barn door is open for bad actors to have their way and make their escape.
To see why, we have to delve into the surprisingly confusing world of the “fiduciary standard.”
Simply put, someone who acts as a fiduciary or upholds a fiduciary standard has a responsibility to put the best interests of their clients first.
But in the convoluted world of regulation, it’s hard to tell who actually has to live by that standard. The rule applies differently to different subsets of the broker/planner/adviser world, and the terms used to describe various types of counselors are all so similar that consumers are confused.
Most think their adviser already has a responsibility to look out for their best interests; they’re mistaken.
Here’s a quick thumbnail on how things work now: Someone selling you advice or counsel has a responsibility to act in your best interests, while someone selling you investment products need only find things that are “suitable” for you.
The difference separates most financial planners from brokers. The planner receives a percentage of assets (or a flat fee) for portfolio management, while the broker is paid by transaction fees and commissions.
As a result, both types of adviser could decide that a client would be best served by owning, say, a variable annuity. The fiduciary would have to sell the client a version with low costs — and low fees — while the broker could sell a higher-priced product, or one that they have special incentives to sell.
Both are “suitable” — appropriate for the customer’s needs and risk tolerances — but only one is in the client’s best interest.
The brokerage community has fought this legislation tooth and nail at every turn, and while they can cite studies and more (mostly flawed, by the way), their actions show an arrogance that the public should not tolerate.
And yet the politicians have let them win, which is why a fiduciary standard that should have been adopted four years ago now appears to be on hold until 2016 at the earliest.
This week, the House of Representatives passed a budget that bars the SEC from imposing a fiduciary standard on broker-dealers during the federal fiscal year beginning Oct. 1.
It was buried in the fine print and missed by most of the media, but it’s the latest pushback, assuming the budget gets approved by the Senate.
Meanwhile, the Department of Labor — which has been looking at a fiduciary rule because it could be applied to advisers for retirement plans — has had several stalls of its own, most recently saying it would not re-propose a fiduciary rule in August, delaying any new motion until January 2015.
You don’t have to be a political expert to see how this plays out.
The Department of Labor has had multiple delays and the most recent one is to make sure everyone in the industry can make comments and suggestions (again). Even if a rule is drafted early next year, it must then go through its comment period, plus revisions, and that drags it out until 2016.
The same goes for any SEC actions, which will be clear the second the budget passes with the delay rule in place.
In case you’ve forgotten, 2016 is a presidential election year, and the only way this kind of rule gets passed in an election year is if it makes for good politics.
The only way that happens is if there’s some sort of market crisis that sparks outrage in lawmakers, legislators and Joe Public.
The fact that the public isn’t angry already is simply because they don’t know of the debate over the F-word, or they don’t see how it might help them avoid catastrophe.
The vast majority of financial advisers and brokers are honest, hardworking folks. They’re not always right, and the stock market may not always make their solutions look brilliant, but their mistakes are usually well-intentioned, and they’d like to serve their clients as well as they can, while also making a living.
A fiduciary standard will not stop rogues and crooks who break the law; those people don’t care who they hurt.
It will, however, prevent some of those “honest mistakes,” because replacing “suitable” with “in your best interests” raises the level of integrity.
That protects everyone, and the fact that so many in the broker-dealer world are fighting it says volumes about their virtue.
That’s not a blanket admonition to avoid advisers. While many people believe no one can take better care of your money than you can, that’s only true provided you are educated and involved enough to make informed choices.
If you need help, however, you should turn to an adviser, and you should start the search by asking any prospective counselor if they have a fiduciary responsibility to you; if not, you might want to stop the discussion right there.
Yes, someday there will be a fiduciary standard. It will be watered down, mostly ineffectual, and it will be too late for anyone who winds up getting lousy advice that makes them feel ripped off in the next big downturn, the one that will finally make the politicians get this done.
Thus, if you are investing with an adviser in this market, protect yourself; if a move does not feel like it’s in your best interests, it probably isn’t.
Also by Chuck Jaffe:
Think twice before you invest in a bear-market fund
The truth about Dow 17,000
Your ‘made in America’ portfolio isn’t what it seems
Chuck Jaffe is a senior MarketWatch columnist. His work appears in many U.S. newspapers. Follow him on Twitter @MKTWJaffe.