By: Laura Walton AFC®
This is what my 10-year old niece said to her younger sister when they were arguing over who went down the playground slide first. It created a win-win…if you didn’t look too closely. My younger niece felt like she went first even though her older sister actually got to go first. This is the playground version of the financial profession’s suitability standard and what new legislation aims to change.
Many financial professionals make the client feel like their interests are placed ahead of the firm’s when in fact the firm’s interests come first. Everybody gets to go down the slide but not in the order that best serves the client.
Yesterday’s NPR piece, “Will new retirement rules protect Americans from Wall Street?” discussed a recently proposed rule, now open for public comment, with U.S. Labor Secretary Tom Perez, David Swensen, Yale University’s chief investment officer, and Kent Smetters, an economist at the University of Pennsylvania’s Wharton School.
The goal of the 100-page rule is to hold financial advisors to a “fiduciary” standard. The public often assumes this is the case but it’s not. Much of the financial profession is held to a lower “suitability” standard. For example, two like mutual funds, one with higher fees than another, might be “suitable” for a client but only the one with the lower fees would meet the “fiduciary” standard.
Secretary Perez talks about “’the corrosive power’ of fine print, hidden fees and ‘backdoor fees’”. Fees are an important topic in our Investing Series classes. They can make a meaningful dent in a portfolio overtime. Unfortunately, they are often hard to identify and clients are left to simply trust their advisor.
Kent Smetters, the Wharton School economist, worries the rule has an exemption that will allow financial advisors to opt out and still benefit from commissions on overpriced mutual funds. David Swenson, Yale University’s chief investment officer, says “I think the biggest threat to this rule is Wall Street’s reaction… [it] will clearly cost Wall Street in terms of the bottom line, and they’re going to fight it tooth and nail.”
As a client, your best protection is to assure yourself that your advisor is held to the fiduciary standard – make sure you are the first one down the slide.