I’ve been investing in the stock market since I was 13 and began working in financial services during my junior year of college. I’ve experienced the tech boom and bust, a real estate bubble, the Great Recession, and the largest Ponzi scheme fraud in history. I’ve also paid close attention to countless efforts by regulators to protect investors, but unfortunately, not much has changed over the past couple of decades.
People inherently trust their financial advisor, but in some cases may feel put off by their sales tactics or have a preconceived notion that the large institutions benefit most. These are valid concerns. While I believe most financial professionals are good people, the system itself is setup in a way that doesn’t typically place clients' best interests first. That’s a major problem, and investors are catching on to these conflicts of interest. (For related reading, see: Top Tip for Financial Success: 'Plan Early.')
The Dark Side of the Field
All too often investors are confused by financial jargon, long disclosures and a lack of transparency. This isn’t new. Every year, large banks, insurance companies and brokerage firms fight hard to keep the scales tipped in their favor. In 2015 alone, special interest groups funded by financial institutions spent over $10 million to lobby against proposed regulations such as the fiduciary rule. Worse than that, these same firms spend hundreds of millions of dollars every year in fines and legal fees; it’s part of their cost to doing business.
It seems like a lot of money to waste, but the math makes sense. For example, the Government Accountability Office estimates that approximately $17 billion is spent each year on unnecessary fees inside of retirement accounts such as IRAs and 401(k)s. These fees, paid by consumers, equals revenue to many of the big financial firms. Noticeable shifts are taking place within the industry, but the rate of change is slow.
Everyone agrees that it’s better for consumers to receive financial advice that is in their best interest—you can’t argue against that. The fiduciary rule that was recently proposed by the Department of Labor aimed to address this for retirement accounts. After more than six years in the making, countless revisions and generous concessions to relax the standards, it was released and met with strong opposition. Ultimately, the bill was killed a few weeks later in Congress and later, the President vetoed its decision. To make matters worse, several groups are suing the DoL in an effort to slow down progress and send a message about adopting similar fiduciary standards.
Keep in mind that a fiduciary advisor is legally obligated to act in the best interest of the client, avoid conflicts of interest and be transparent with fees. But a story was sold to politicians and the media that if such a standard were implemented, the costs for investors with small accounts to gain access to financial advice and resources would be prohibitive. (For related reading, see: Going the ETF Route? What You Should Know.)
But I’m an industry insider, and I’m here to tell you that’s not true!
The truth is, many large financial institutions generate significant revenue as a result of these conflicts of interest inherent to their business models. This is how the industry has traditionally operated and those inside the business know this. In order to change their business models and provide services that place the client's best interests ahead of the firms, these financial institutions would take on more liability, give up revenue and potentially incur new costs; all of which are things they don’t want to do.
Getting Closer to Goals
New technology and the increasing number of small independent advisory firms are driving down costs and creating better service models that align firms' goals with those of their clients. There’s more access than ever to good, low cost financial tools and advice. In the spirit of full disclosure I must admit that I am a fee-only fiduciary adviser, but everything I’ve shared is factual public knowledge. And what I’m about to share may surprise you …
I don’t believe a fiduciary standard can be adopted across the entire industry. Moreover, I do not support a fiduciary rule to be adopted if it’s watered down with concessions and loopholes like the DoL's current proposal. I call that being a fiduciary with disclosures, and that’s just going to confuse consumers even more than they already are. Yes, of course I want consumers to receive financial advice that’s in their best interest, and that’s what I believe is the key to this entire debate: being honest about the difference between financial advice and a sales pitch.
The notice below is posted on FINRA.org (Financial Industry Regulatory Authority):
“Also be aware that Financial Analyst, Financial Advisor, Financial Consultant, Financial Planner, Investment Consultant or Wealth Manager are generic terms or job titles, and may be used by investment professionals who may not hold any specific credential.”
So basically anyone can use the job title financial advisor because it isn’t regulated and doesn’t really mean anything. In fact, the vast majority of financial advisors are brokers and insurance agents: simply stated, they are salespeople. They are paid commissions depending on the products they sell and their firms incentivize them to sell certain products over others. These salespeople do not provide financial advice. If they want to provide financial advice, then it must be through a different company. To get around this, many banks, brokerage firms and insurance companies establish separate entities to conduct this type of business. (For related reading, see: A First Look at the Finalized Fiduciary Rule.)
The Grim Future
If this sounds confusing that’s because it is. How do consumers know when their financial advisor is acting like a broker or when they're acting like a fiduciary? It’s a very blurry line. Coming from someone that used to work in this type of an environment, it was even hard for me to understand the difference, and most professionals don’t.
What’s worse, regulators don’t have adequate resources to police the industry and focus most of their efforts on investor complaints and fraud. When large firms get caught for violating rules, they simply pay the fines and move on—it’s business as usual. You’ve seen these stories in the headlines, but the next day it’s no longer news and we repeat the cycle.
The only clear solution is to clarify the difference between financial advice and selling an investment product. There are plenty of consumers that simply want to purchase a financial product; they aren’t seeking financial advice. If someone wants financial advice from a professional, it should always be in that person’s best interest. These services should be separated along with other things that create major conflicts within large financial institutions. It seems obvious to me. During the financial crisis we were worried about “too big to fail,” but instead we now have even fewer banks and financial firms, many of which are larger than they were in the past. (For related reading, see: How to Avoid Middle-Class Money Traps.)
Stephen Rischall is an award-winning fiduciary financial advisor. He began learning to invest at the age of 13 and helped manage the University Corporation Student Investment Fund while studying finance in college. Stephen has been featured as the financial expert for Millennials on live radio and in the news. He is an avid adventurer and is passionate about helping people make smarter financial decisions.