In Defense of Conflicts of Interest, Wall Street Goes to Washington by Bobby Monks and Justin Jaffe, Uninvested: How Wall Street Hijacks Your Money – and How to Fight Back
The House Financial Services Committee is scheduled on Thursday to begin four more days of public hearings on the Department of Labor’s proposed rule change for financial advisers. If passed, the rule would expand the application of the fiduciary standard — requiring advisers to put clients’ interests first — to all providers of retirement investment advice.
At the hearing, Wall Street will undoubtedly continue its campaign against the rule change. The industry’s enablers in politics and media will dutifully regurgitate bogus message points designed to alarm middle class investors. Legislators in both parties have already attempted to attach a provision to the Fiscal Year 2016 Labor, Health and Human Services Funding Bill that would defund the Department of Labor from implementing the rule.
Opponents argue that the rule is being rushed through. That it will increase costs and limit choice. That it will leave middle class investors without access to much needed counsel.
Of course, these specious, straw man arguments are a cynical effort to divert attention from the rule’s unimpeachable objective: providing additional protection for middle class investors being systematically taken advantage of by the financial services industry. The White House Council of Economic Advisors estimates that advice tainted by conflicts of interest costs investors $17 billion annually. No wonder Wall Street has its hackles up.
Has including ESG become a necessity for investors?
Among the more ironic twists here is the financial industry’s argument that the rule’s passage will require investors to sign complex contracts before receiving advice. Have you read a mutual fund prospectus lately? Overcomplicated avalanches of jargon-packed disclosure are a pre-existing condition of the financial services business. In fact, it’s just one more reason why investors deserve a simple, universal standard of protection that requires all advisers to put clients’ interests first.
In its permissiveness toward non-fiduciary financial advisors, the current regulatory environment reflects its imbalance. Funded by the very corporations it’s charged with overseeing, the Financial Industry Regulatory Authority supervises the 90% or so of financial advisors that sell what’s best for them instead of investors. In contrast, a government agency, the Securities and Exchange Commission, regulates the minority of registered investment advisors who are obligated to always put clients’ interests first.
As a result of these different ethical standards and rules of engagement, fiduciaries and non-fiduciary advisors have vastly different business models. Though both market themselves as financial advisors, the incentives for an “advisor” earning a commission for selling a product (like a mutual fund) are dramatically different than those for an advisor selling a flat, fee-based service (like a registered investment advisor). When you have oranges selling themselves as apples, it contributes to an already complex and confusing marketplace. Investors ultimately end up paying the price.
Though it appears likely that the new fiduciary rule will take some important steps toward leveling the playing field, it doesn’t go far enough. For example, it should once and for all prohibit the practice of revenue sharing, in which mutual fund companies pay 401(k) plan administrators or sponsors to put their funds on retirement plan menus. Stark conflicts of interest like revenue sharing are not acceptable, especially when they prey on a particularly vulnerable group like retirement savers.
Ultimately, it will remain investors’ responsibility to ask tough questions of their financial advisers and money managers. Are you a fiduciary? What are the fees? Do you invest in what you sell to me? With so much at stake, investors saving for retirement may hope for better rules but must continue to watch out for themselves.
Bobby Monks is the former Chairman of Institutional Shareholder Services. His book with Justin Jaffe, Uninvested: How Wall Street Hijacks Your Money – and How to Fight Back, was published by Penguin Random House in August.
Uninvested: How Wall Street Hijacks Your Money – and How to Fight Back by Bobby Monks and Justin Jaffe