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DOL Fiduciary Proposal Must Be Broader: Bobby Monks

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While the Labor Department holds a marathon of hearings on its proposed fiduciary rule for financial advisors involved in retirement accounts, Bobby Monks, entrepreneur and former chairman of proxy firm Institutional Shareholder, says the DOL’s proposal doesn’t go far enough.

“If someone is giving you advice they should probably put your best interest first,” says Monks. “The [DOL] rule is very important. It ought to be broadened … to beyond retirement assets.”

Monks is the co-author of a new book, “Uninve$ted: How Wall Street Hijacks Your Money and How to Fight Back,” with Justin Jaffe and Bree LaCasse, and he visited ThinkAdvisor’s New York offices recently.

Monks says the U.S. financial system “is broken,” filled with intermediaries whose fees are borne by investors but not clearly disclosed and who don’t have to put the interest of their clients first, before their own.

“The individual investor is being taken advantage of by the financial services industry,” says Monks.

He attributes the problem to what he calls the “financialization of America” where tens of millions of households are invested in mutual funds and other financial assets through 401(k) and IRA plans but have “outsourced” the responsibilities of ownership to a “monolithic financial intermediary complex.”

Financial intermediaries such as mutual funds and pension funds controlled roughly 75% of U.S. equities, or more than $37 trillion worth in 2010, according to Monks.

While Monks would like to see financial intermediaries, including financial advisors, put their clients’ interests first and disclose more about fees, he says investors also need to step up and take responsibility.

“For the average investor the biggest risk is not being engaged, not paying attention,” says Monks, noting that mindset would cost them in the long run.

Monks gives the example of an investor who pays a 1% fee to invest $25,000 over 35 years, earning an average 7% per year. At the end of that 35 years the investor has given up $65,000 due to fees, says Monks.

Investors instead need to take control, says Monks, and he offers two approaches. One relies on investors asking themselves and their money managers key questions about priorities, investments and fees and acting on what they learn. The other approach is an alternative, cooperative model for investing. Monks says advisors also can pose some of the same questions to the managers of the companies whose stock or bonds they buy.

Key Ways to Take Ownership

  • Know Your Money Managers. Do they follow a fiduciary standard? Are they investing in the same products he or she is buying for your portfolio? Are the products in your portfolio best for you or more profitable for the manager?
  • Know Your Portfolio. Request a comprehensive list of all the investments in your portfolio. Ask your money manager why they were chosen and ask yourself if they reflect your values.
  • Total All the Fees You Pay. Ask your money manager to list and explain all fees in your account including transactions costs charged or passed on to you as well as an analysis of returns, opportunity costs and effects of fees, inflation and taxes on your account. This could uncover information and fees that investors know nothing about. Monks explains: “Some [money managers] keep the trading fees they charge investors: some pay broker-dealers to trade stocks and bonds and then collect a kickback.” He also suggests investors ask what their portfolio is worth if it were liquidated today in order to get a “real account balance. “
  • Vote Your Proxy. Monks, the son of Robert A.J. Monks, a well-known corporate governance advocate, says  corporate governance is important and investors should have their voices heard on the issues that matter to them. These could include executive pay and business practices that have environmental, social and financial impact.
  • Seek out Conflict-Free Information. Learn where your money manager gets his or her information and steer him or her toward such sources as Global Impact Investing Ratings System, MCSI Ratings and Gimme Credit.        

A New Model for Investing—the Cooperative Investment Partnership

The CIP is a mutual corporation where the customers are also the owners of the business, sharing in profits and governance. They are not publicly traded and have no shareholders and the profits are distributed to the owners (investors) in the form of dividends or premium rebates. In his version, executive pay is capped at 10 times the median salary of the employees. 

Monks likens the partnership to a broad definition of a family office. “People create family offices because they don’t want to pay anyone else the fees,” says Monks.

“We believe that financial advisers and money managers who are willing to shift to the new paradigm will instantly find market of hungry investors eager to work with them,” writes Monks.

Short of a CIP, Monks suggests that investors ask their money managers to share profits, access to corporate financial statements, waive fees when there is no return and be recognized as a partner in the investing process.

Isn’t a CIP or this alternative to one very idealistic?

“I’m not an idealist,” says Monk. “I’m a capitalist who has started 19 different companies.” 

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