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Regulate This

Insights

Food labeling regulations have made it easier than ever for shoppers to know how much of and what exactly they are eating. This country, however, still has an obesity problem. Similarly, increasing regulation for financial advisors won’t necessarily cure the retirement savings problem.

It’s big news that President Trump is considering doing away with the Fiduciary Rule that former President Obama created. The Rule is designed to protect investors against unscrupulous financial sales people by requiring them to act in the best interest of their clients. (Registered Investment Advisory firms such as Next Investments have always been required to act as fiduciaries) The reality is that whether this rule goes forward or not, it won’t help the people who really need help because it doesn’t solve the underlying problem.

The Rule sounds good! Of course financial sales people should work in the best interests of their clients. The Rule would require financial sales people to sell their clients the investment with the lowest fees. Less fees means more money in the investor’s pocket, which means more money for retirement.

Problem solved! Everyone can retire now because we’re not getting ripped off anymore, right?

Wrong.

By regulating prices, many of the people who really need help won’t get it because they are not profitable accounts. Who remembers the gas lines of the 1970’s when the Government capped oil prices?

The Government’s job is to protect citizens from fraud and danger, not to make sure we all retire in style. That’s the job of the financial advisor! So why don’t all financial advisor clients retire wealthy? Is it because their advisors all charge high fees? With the exception of some who have endured real financial hardship, it’s because they choose not to. For one reason or another, they choose not to follow the financial advice given by their advisor.

The fact is that most financial sales people, advisors, planners or whatever they call themselves, “do” work in the best interests of their clients, even though they are not “required” to. Most financial people are genuinely good. Thinking about the advisor/client relationship objectively, logic tells us that when an advisor helps a client succeed, then the advisor succeeds as well.

The focus of the Fiduciary Rule is on the high fees charged by financial institutions and sales people. I agree, some of the fees I’ve seen people pay are out of control. But that isn’t the whole reason that many people won’t be able to retire. The problem that the Rule should focus on is that advisors and the financial companies they work for are “for profit”. This is am inherent conflict of interest.

So yes, it’s the Government’s job to mitigate this conflict of interest with regulations. I agree with the Rule on this point. One regulation I specifically agree with is pricing disclosure. 401(K) plans are required to provide transparent pricing now. Now we can see what a plan with “no fees” really costs. I believe this should be expanded to include all financial products, not just 401(K)’s. (No, a 250 page investment prospectus is not a good disclosure. It just wastes paper!)

As an example of good disclosure, how many of you remember way back before the Government required nutrition labels on food? Food companies used to try and trick us just like “no fee” financial products trick us into thinking we won’t pay anything. Before the new food labeling regulations, there was no way to figure out how many calories we were eating. The old labels would tell us there are 17 servings in a one-pound package, but the amount of one serving is two ounces.

But even with good disclosure, some of us still decide to eat more calories than we are supposed to. And that’s the real problem, self-control. Many people are just not saving enough.

It’s silly to think that transparent pricing disclosure (or rules capping the price) of financial products will mean that suddenly everyone will start to save enough. In fact, Fidelity jut released its annual survey of 401(K) account balances and found that they have increased to a record average amount of $92,500 per account by the end of 2016. While this is encouraging, I’d like to know the average age of the 401(K) account holders. This amount is good for someone in their 30’s, but not so good for someone in their 50’s.

We’ve all heard stories about the little-old-lady who lived frugally all her life, then retired with a multi-million dollar fortune. She kept all her money in the bank, so she paid no fees, but she also didn’t earn much interest. How did she do it then? She saved over half of her income for her entire working career!

I don’t think that President Trump should cancel all parts the Fiduciary Rule. I think the disclosure rules will certainly help people make better investment decisions. Disclosure requirements should also lead to lower financial product prices. It’s not a silver bullet, however. Retiring in the manor in which you desire takes personal responsibility and discipline to save and invest.

Let’s make a deal. I’ll eat less calories if you save more.

Tom Wright & Next Investments © 2017


(804) 591-1657