Fiduciary standard threatens to strand investors south of the border

Fiduciary standard threatens to strand investors south of the border

Fiduciary standard threatens to strand investors south of the border President Obama came out last week with a call for brokers to act as fiduciaries when advising their clients. Opponents believe this makes investment advice too expensive for a wide swath of Americans.
The National Association of Plan Advisors goes as far as suggesting it leaves many people with no advice whatsoever.

Bloomberg columnist Paula Dwyer’s written an interesting piece defending the Obama administration’s move to broaden the definition of fiduciary arguing it won’t result in investors being stranded without advice. Here’s why.

Dwyer points out that opponents to the broadening of the fiduciary rule use a 2011 study paid for by 12 financial services companies as part of their argument why it’s a bad idea.

Dwyer’s article states:

“That study says lower-income investors prefer to work with brokers (who don't have a fiduciary duty and are paid through sales commissions, revenue-sharing deals and other fees) over registered investment advisers (who are paid directly out of a client's pocket and already must put client interests ahead of their own).”

Oliver Wyman conducted the study using data compiled from those 12 companies’ customer accounts. Interestingly, Dwyer points out that the study didn’t ask customers which type of advisor – broker vs. RIA – they preferred.

Like the embedded compensation argument in Canada, many use brokers in the U.S. because there aren’t any out-of-pocket expenses. Sound familiar?

The White House estimates that conflicted advice costs investors $17 billion annually in lost retirement savings. Its push to broaden the number of advisors working under the fiduciary standard is an effort to stem those losses. The Securities Industry and Financial Markets Association (SIFMA) disagree with this number and plan a rebuttal.

However, Dwyer hits the nail on the head toward the end of her article when she explains that the estimated 7 million customers the 12 companies in the Wyman study say would be left without advice under a fee-based system because they wouldn’t meet the minimum balance of $25,000-$50,000 is simply bunk. If they wanted to they could simply lower the minimum.

 “What the Wyman study is really saying is that a fiduciary duty would destroy the brokerage business model,” says Dwyer, “which has grown up around the back-door payments that induce brokers to place client money in underperforming funds. Without those payments, it would be too costly to provide non-conflicted advice. That's different from saying Obama's fiduciary rule would harm lower-income savers.”

While the players are different in Canada, Dwyer’s arguments seemingly apply. Those afraid of a fiduciary standard doth protest too much. Investment advice isn’t free. One way or another investors always pay.