Which Is Better: Bad Advice or No Advice?
Did you know that there are two different standards for investment advice depending on who provides it? Advisors (or salespeople) at brokerage or insurance companies are legally allowed to recommend an investment that may cost you more than alternative investments (thus providing them with more income) and that may not meet your risk or return needs as long as they can prove that the investment is suitable for you. Advisors at Registered Investment Advisor (RIA) firms, by contrast, are required to put your interests ahead of their own. This latter regulation is known as a fiduciary rule, and under it that same investment recommendation would be illegal if it benefits the advisor more than you. This dichotomy in investment advice has been around since 1940.
Five years ago President Obama called on the Department of Labor (DOL) to standardize these two different rules under a single fiduciary approach. As he put it, “It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first.”
A day before the DOL’s new fiduciary rule was finally to go into effect earlier this month (yes, it took that long!), Rep. Phil Roe (R-Tenn.) and Rep. Peter Roskam (R-Ill.) introduced the Affordable Retirement Advice for Savers Act (H.R. 2823) in Congress. The purpose of this bill, according to its authors, is to “protect access to affordable retirement advice by overturning the Obama administration’s flawed fiduciary rule while ensuring retirement advisors serve the best interests of their clients.”
The affordability concern stems from the fiduciary rule’s opponents’ belief that RIA advisors who provide financial advice on a fiduciary basis charge more than commission-based financial institutions. Yet according to a report from Personal Capital Corporation (as reported by Bloomberg in 2016), the average total annual fees collected by eleven brokerage firms was over 1.6%, with Merrill Lynch topping the list at 1.98%. Since the average fee-only RIA advisor charges about 1%, the assertion that RIA advice is more costly becomes highly questionable at best.
What about the statement that the bill still ensures “retirement advisors serve the best interests of their clients?” H.R. 2823 replaces the stronger fiduciary requirement with a simpler set of disclosure requirements. Here’s one: “This recommendation may result in varying amounts of fees or other compensation to the person providing the recommendation … and the same or similar investments may be available at a different cost (greater or lesser) from other sources.” How does that ensure that the advisor is putting his/her clients’ interests ahead of his/her own? And as if that weren’t soft enough, there’s also an escape clause for the advisor. Under section 13B the advisor cannot be held responsible for failing to disclose his/her fees if the advisor, “…acting in good faith and with reasonable diligence, makes an error or omission in disclosing the information…”
The most interesting disclosure requirement is the one that allows advisors (or more presumably salespeople) to entirely disclaim responsibility for any recommendations they make simply by stating the following: “This communication is not individualized to you, and you are not intended to rely materially on this communication [italics mine] in making investment or management decisions.” If you shouldn’t rely on it, what good is it?
The authors assert that H.R. 2823 provides “transparency and accountability through clear, simple and relevant disclosure requirements.” But aren’t the bill’s proponents really saying that good financial advice may be unaffordable to some people; therefore we should allow providers to offer cheaper advice even if it’s biased or unreliable? It’s bad enough that there are salespeople purporting to be advisors who are more interested in making money off of you than in making sure their recommendations are in your best interest. (Remember Bernie Madoff?) Why do Roe & Roskam (and whoever else ultimately votes for this bill) want to support them at your expense? Do they feel it’s better to ensure access to bad advice if you can’t afford good advice?
You can review the bill yourself at https://edworkforce.house.gov/uploadedfiles/hr_2823.pdf.