Trashing the Fiduciary Rule – Yes, It Will Affect You!

I know I said last week I do not usually resend other people’s articles, but please read John Bogle’s Op-ed in the New York Times about the administration’s trashing of the Fiduciary Rule. I’ve been meaning to write about this and now is the time. The new administration has slowed the progress (and could possibly stop altogether) a Department of Labor ruling that was supposed to go into effect in April 2017. The ruling (referred to as the Fiduciary Rule) says that brokers and investment advisers (a.k.a. “your guy who manages your money”) MUST put client interests FIRST before their own interest when recommending investments for a client’s RETIREMENT account.

There are 2 things to note in the sentence above:

  1. client interests
  2. retirement accounts

Let’s discuss both. “Client interest” means your interest. It means that right now your broker or adviser is legally allowed to recommend investments (e.g. mutual funds, bond funds, stocks, etc.) for your retirement funds that make him a lot of money in commissions and may not make you the most money in the long run either because of lackluster performance OR high fees that erode your gains in your RETIREMENT funds. You should be furious. Retirement funds are the ones that will keep you from eating cat food in your dotage. It’s pretty damn important.

If you are paying a bunch of commissions (also referred to as “loads”), high expense ratios (different than loads, these are fees charged by the actual underlying mutual fund manager) and possibly a wrap fee or a percentage of your entire account to your broker, you may not get the best return because the fees are crushing you. People are investing for 30 and 40 years and having 4% returns TOTAL (not each year) and can’t figure out why. The reason is usually fees, and now the administration is saying we do not need to rush into a rule that forces investment advisers and brokers to forego their largest commissions and concentrate on getting the best return for their clients, which many times means low cost index funds.

Next, the second important concept: Retirement Accounts. These are your 401ks, IRAs, SEP IRAs, TSPs, 403bs, and several others. The rule, if it ever happens, only governs your retirement accounts. Your regular investment accounts, also known as brokerage accounts are not even affected by a rule that should never have to be a rule in the first place. Those non-retirement accounts can still be raked over the coals for the highest commission mutual funds and investments possible.

Doesn’t sound fair, does it? It’s not. It should be illegal. It’s not. What if your doctor didn’t have your best interests in mind when she prescribed medicine. What if she gave you a bunch of prescriptions you didn’t need because she made a commission or worse, gave you the wrong medicine because she made more commissions from the wrong medicine than the best one. Clearly, that would be illegal, but this is somehow not. Yet.

Always question your “guy who manages my money.” How much is the commission on the product? Is there another way to achieve the same thing. Why is an index fund not appropriate? You have to be your own best advocate here, because clearly the regulators will not be.