The current administration has pledged to overturn the Labor Department’s fiduciary duty rule — a new rule forcing financial services providers to offer retirement account investment products chosen in “the sole interest of the beneficiary of the plan.”
In other words, it mandates the behavior that defines a “professional.” To me, the word “professional” has always meant a person who recommends for clients what they would purchase for themselves knowing what they know about the possible alternatives and prices.
Enactment of the rule is estimated to cost the financial services industry $20 billion over the next two years — according to the industry. If that’s what it will cost the industry if kept in place, that’s how much it will cost clients if it gets trashed.
Just for fun, take what may become that excess annual loss to clients of about $10 billion, and compound it at, say, 8 percent for 30 years to see what the total dent in retirement savings amounts to in the aggregate. Hint: it’s in the trillions.
This is why the Labor Department has felt compelled to step up in our behalf. After all, its mission is to protect the rights of American workers. If there’s any organization devoted to Making America Great Again for middle-income workers, it has to be the Labor Department.
Gary Cohn, the president’s new director of the National Economic Council, was brought in from Goldman Sachs to help “drain the swamp.” Cohn weighs in by calling the fiduciary rule “a bad rule.” It will presumably deprive people of the help they need managing their financial affairs.
“Besides,” Cohn says, as he struggles for an analogy, “people who want to eat bad food should not be forced to eat healthy food.” I think losing a third of your retirement nest egg is different. Moreover, it’s an insult to be told that unless we spend an extra $10 billion a year, we can’t get adequate investment help.
Apparently, the investing public is not well served by just a simple explanation of a fee-for-service arrangement that has them simply writing a check for the advice they receive — a business model that satisfies a growing number of customers while offering ample compensation to registered investment advisers who have chosen to have that relationship with clients. Instead, the argument is that the public needs complicated financial products with complex commission arrangements that never depict the long-term opportunity costs of embedded fees.
John Bogle, the founder of the Vanguard, wrote an op-ed piece in The New York Times titled “Putting Clients Second,” in which he cites the $20 billion figure mentioned above and then goes on to talk about the fact that the fiduciary rule does not go far enough. It protects only retirement plan money in 401(k)s, IRAs and other retirement plans.
What about the other two-thirds of the money invested in the nation’s common stocks? Assets outside of retirement plans do not benefit from the new law, and this sets the stage for all manner of fee issues that leave investors in the dark as to their costs. We can start with the spreads between buy and sell pricing on increasingly popular exchange traded funds. Most people think their only cost is the stated trading commission, which is often next to nothing. It could amount to substantially more that we never see.
Stocks held in street name are only protected up to $500,000 by the Securities Investor Protection Corp., and we came very close to having to test that government insurance coverage back when Congress first refused to vote for the Troubled Asset Relief Program, Many people, now aware of the potential for a brokerage firm’s collapse, assume that the government will always step in and they did, but tell that to the “debt ceiling” stalwarts who have greater voice today than they had in 2008 and see if you get even part of your $500,000 insurance after some future collapse.
The fiduciary rule represents a great leap forward in the way of protecting America’s middle-income workers who are less steeped in financial know-how than those in the so-called “knowledge-based” workforce. To trash this element of protection so that working people and retirees can be sold the “junk food of investment products” is a huge disservice to those who struggling the hardest to create financial security.
It doesn’t feel like putting these savers at a disadvantage deliberately so that Goldman Sachs can make more money is contributing to the lives of the part of America that has the greatest need for cost-effective investment help.