The New Fiduciary Rules: Good Or Bad?
- Created: Friday, 15 April 2016 13:42
Currently, stockbrokers and insurance agents can freely recommend high-commissioned products as long as the investment is “suitable.” This is not beneficial to investors, who often don’t know the difference between an RIA and other “investment advisors.” The new rules will provide investors who have retirement accounts, including IRAs, protection from potential predatory sales practices.
Yet, there is still debate on the new rules. Do they go too far? Do they not go far enough? Taking the latter question first, there are some significant loopholes in the new rules. First, they don’t begin implementation until 2017. Second, they don’t apply to non-retirement accounts. And, third, there are exceptions as to what constitutes “advice” subject to fiduciary requirements. In my opinion, the new rules don’t go far enough. However, it’s a start. That’s better than nothing.
Those of the opposite opinion tend to be non-RIAs—stockbrokers and insurance companies (“brokers”). One of their main arguments against the new rules is that they will no longer be able to serve small investors. Rather than getting 5 to 7 percent on new contributions into retirement plans, plus possible trailing commissions, they might have to settle for 1 percent a year on the entire balance. Aside from the math, they argue, it might be difficult to implement an AUM fee in retirement accounts.
Another issue brought up by brokers is the impracticality of changing from commission-based to fee-based compensation on retirement accounts. After all, is it fair to begin charging an AUM fee on investments that have already absorbed commissions?
The real question is: What is best for the investor? It is true that the new rules might significantly reduce revenue opportunities for brokers. However, as I see it, the interests of the [unsophisticated] investors should certainly take priority over whether or not brokers will need to pursue a new business model. The adage “That’s how we’ve always done it” just doesn’t cut it.
There’s time to plan for transition. If the brokers don’t find a way to truly act in a fiduciary manner (with respect to retirement accounts), then they might go the way of horse-drawn carriage companies. The result could mean more money going into low-cost index funds, such as Vanguard, or into robo-advisors (who will also have to deal with the new fiduciary requirements). Or, RIAs will find a way to economically serve smaller investors.
The needs of investors come first, and brokers should work toward the greater good. In the long run, this will create a more stable business model. When investors win, we all win.