Trump Kicks The Little Guy, Helps Wall Street Kill Honesty Rule
When you meet with a financial professional, the advice you get from them can change the trajectory of your life. An investment you make today can have serious implications for years to come. Getting advice that puts your needs before the needs of the advisor is something called a “fiduciary duty”. Why is there an argument raging now about a new rule from the Department of Labor? The proposed rule says people with retirement plans should get unbiased advice and put their needs before their broker. The Obama administration put the rule in motion, but by executive order, President Trump wants to put a halt to its implementation.
What Is The Current Standard?
Wall Street and insurance companies are not required to put your interests ahead of their own. They are only required to make sure that your investment and their advice is suitable to you.
Suitable means your situation, your needs, your risk tolerance and your goals. This can be a bit murky as well. Being suitable can be defended in many ways. A product may be suitable now but not suitable in the future. Does the product or recommendation have to be only 51% suitable or should it be 90% suitable? Actually it is whatever can be defended in a self-regulated system. A system that requires you to go to arbitration. The deck is stacked against the average consumer.
The other issue with suitability is compensation. Higher commissioned products and incentives like gifts and trips influence financial salespeople regularly. Insurance companies offer lavish trips for large volumes of premium, and higher commissioned product almost always carry larger fees paid by the consumer.
Brokers and insurance agents are salespeople first. Their livelihood is based on sales. The more they sell the more they make. How do you think they are evaluated when it comes to job performance? It is simply sales volume, and total commissions generated. The people closest to the consumer, the sales people, have superficial investment knowledge and no fiduciary duty. It is easy to see the break-down and the conflict in the relationship. Without a fiduciary standard, the holder of the information, the broker or agent, is at an extreme advantage. The system is rigged.
The internal conflict on a financial salesperson must be either difficult to deal with, or completely ignored. Being a fiduciary in the world of retail would require a salesperson to tell a customer that, ”We don’t have that style purse, but the one you really want is just down the street at my competitors, let me give you directions.” Client’s best interest served. Sale not made.
So Why Is Doing The Right Thing So Difficult?
The new fiduciary rule compels people acting as a trusted advisor simply do the right thing. It also prevents people who hold themselves out as a fiduciary to actually be a fiduciary. The reason it’s difficult to implement this change is simple. You know the answer. It is the money. The commissions generated and the fees taken by large institutions are made up largely by the retail consumer. The Wall Street backlash has been both swift and powerful. Research from Morningstar Inc. puts the cost to the financial industry at 2.4 Billion Dollars. The fight to defend the incredible amount of money generated on Wall Street is an affront to the institutions that continue to bilk hardworking Americans. Until the DOL rule is implemented, ask and confirm that the person giving you advice is a fiduciary.
There are independent advisors who despite this ruling have the client's best interest as their number one priority. Often investing in stable and risk-free products such as annuities may not be as beneficial to the advisor but it could make the difference between having a fruitful income through your retirement years instead of investing in failed stocks. Find an advisor local to you who has your best interest at heart and not just a higher commission.