Not that long ago, I wrote about what it means to be a fiduciary - you know, taking responsibility for your actions, being held accountable for the advice you give, and putting your client's interests first - as we continue to wait in anticipation for the Office of Management and Budget (OMB) to green light the Department of Labor's final ruling on its proposed fiduciary ruling.
With this ruling, the DOL is set to increase the standard of providing advice to retirement accounts - 401(k)s and IRAs as an example - to a fiduciary standard vs. a suitability standard.
What's the the difference between the fiduciary standard and the suitability standard, you might be asking yourself and why does that matter?
Look at it like this: You're out car shopping, trying to find something to haul the kids around in. You know you need space, so a minivan or some sort of used SUV is what you had in mind.
The first dealer recommends Option 1: "Come on, look at all that space. You said you wanted space."
The second dealer recommends Option 2: "Spacious for a growing family, yes, but it's also very safe with lower entry points for little legs climbing in, multiple air bags, and its below your budget."
Which vehicle is in your best interest to purchase?
It's a little extreme but that's intentional: Critics of the new rule still want to be able to sell you a hot pink stretch Caddy when the minivan is in your best interest!
As a fiduciary myself, it's been surprising and unfortunate, to hear the hypocrisy across the Financial Services industry.
Take for example the following:
- Dave Ramsey, known for his radio show and Financial Peace University, caused a stir on Twitter by blasting the rule, claiming it was going to hurt middle and low income families
For someone who encourages tithing, following God, and slams the "salesperson" tactics of insurance products, its ironic that he's against the DOL rule proposal - do as I say, not as I do, right? Here is another take on Dave Ramsey, with some excerpts of other XYPN members.
- The Plan Sponsor Council of America (PSCA), an industry association for retirement plan sponsors, supports the Best Interest Contract Exemption and claims small plans will be disproportionately affected in a negative way in this full press release
Basically saying that if it's mandatory to act as fiduciary when giving advice regarding retirement accounts, we support a special rule that nullifies that mandate.
- The National Association of Insurance and Financial Advisors (NAIFA) claims, "The costs to firms and advisors of implementing such a complex rule will result in higher costs and reduced access to advice, service and products for retirement savers. This will likely result in fewer plans, fewer participants and lower overall retirement savings."
- From the same article: "Business owners need encouragement and advice in setting up retirement savings plans for their employees yet this proposal would limit an employer’s ability to receive needed advice."
There is very little transparency within insurance products and the fiduciary rule would make it impossible to keep it that way.
- US Chamber of Commerce is contemplating a lawsuit if the rule that is announced isn't to their liking, stating only 17% of small business offer retirement plans and this rule would make it even more difficult to increase that number
Not sure where that number was taken from, but according to the Social Security Administration's very own study, 80% of firms with 10 or more employees offer a retirement plan. The same study concluded:
"Overall, the main implication of our findings is that, contrary to widely accepted beliefs, the proportion of private-sector workers with pension offers and participation is higher than previous research has found, suggesting that future retirees may have wider access to retirement funds because of higher participation."
My biggest issue is how so many of these critics are pulling in class warfare, claiming they are defending the Middle America investors and justifying their stance of disapproval.
I'm going out on a limb here by assuming there isn't a whole lot of Iowan farmers or Minnesota school teachers, calling into big Wall Street firms saying, "Hey, I'm really glad you've been over charging me for the 15 years I've had an account with you. Through all of the 20+ representatives I've had, due to turnover over, especially since you just take the fees out of my investments for no good reason, I'd like to have you represent me and say "No" to looking out for my best interest."
The starting bell will ring soon - DOL in one corner and a whole lot of deep pockets in the other. I'm looking forward to seeing how this plays out - stay tuned!