Why Focus Only on the Surface Costs of Fiduciary Advice?

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Some independent advisors undoubtedly are following with interest the current debate between the Department of Labor and the securities industry over a fiduciary standard for IRA advisors. If you’re not, you should—it’s providing a sneak preview (a pre-season game, if you will) of the arguments that will be made whenever the SEC gets around to issuing its own fiduciary standard for retail brokers. 

An illuminating example of this was reported on AdvisorOne August 31 by John Sullivan in “Fiduciary Backers Renew Critique of Oliver Wyman Study,” which detailed Wall Street’s latest attempt to show why brokers acting in pension investors’ best interest would drive up costs, reduce access to advice, contribute to world hunger, climate change and cause widespread impotence (at least among brokers). 

But despite the seemingly skewed findings of the Wyman Study—including investor cost increases of up to 195%, and preventing 7.2 million Americans from having access to IRAs—it and the ensuing debate over the Study’s veracity, touch on the central issue of retail advisory regulation: Consumer protection vs. freedom of choice. And at the center of this perennial conundrum is the cost of advice. 

Given our current sound-bite culture, I suppose we really can’t blame the financial industry for its dogged focus on consumer costs (although I still do): the overly simple fact is that on the surface, at least, getting “free” advice is always cheaper than paying for advice. But what neither side of the fiduciary debate seems to be interested in talking about is why. I guess it’s also not fair to criticize fiduciary advocates for failing to address this point: It involves exactly the kind of complex explanation that causes the modern consumer’s (or voter’s) eyes to glaze over and change the channel back to “Survivor.”

In this case, Barbara Roper, director of investor protection for the Consumer Federation of America, is quoted criticizing the Wyman Study this way: “Part of it is just the opacity of what they are doing. They released the study, and then refused to release the underlying data for further scrutiny.” Wyman, of course, responds that they did in fact release the underlying data, and most observers are left scratching their heads over a “confusing” he said/she said (literally) standoff.

The real answer should be something like this: “Of course non-fiduciary ‘advice’ is cheaper: it’s being paid for by brokerage firms and/or investment companies.” The real question why is this allowed to be characterized as “financial advice” delivered by “financial advisors?” Are we really protecting investment consumers by allowing salespeople (not that there’s anything wrong with that) to masquerade as advisors? 

Which brings us to the freedom of choice issue. Should investors, including retirement investors, be allowed to hire brokers to execute their transactions? Of course. There’s a large and growing portion of the investing public, driving in part by the Internet and the proliferation of high-tech investing tools, who want to manage their own portfolios. To them, I say go for it: someone’s got to be on the other side of all those profitable transactions. With the caveat that they know exactly what they are getting, and not getting, for their commissions and trading costs. 

This should be the point that independent advisors and other proponents of a universal fiduciary standard drive home: There are two parts to every transaction—the costs, and the products or the services one gets in return. The brokerage industry only wants to talk about the surface costs. It’s time we started talking about what financial consumers are giving up in return for their “free” advice. I suspect that if most people understood the financial conflicts of interest and lack of someone advising in their best interest they’d think twice about that “free lunch”—and our representatives in Washington would be a lot less likely to only focus on the costs.

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