Author Topic: Changes to law on fiduciary responsibility for advisors and brokers  (Read 4995 times)

Glenstache

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Heard this on the news this morning, and thought it would be of interest to this community.
http://www.nytimes.com/2016/04/07/your-money/new-rules-for-retirement-accounts-financial-advisers.html?hp&action=click&pgtype=Homepage&clickSource=story-heading&module=first-column-region&region=top-news&WT.nav=top-news&_r=0

Short version is that the law requires disclosure of conflicts of interest in financial advising and that there is a legally enforceable fiduciary responsibility. There may be plenty of devils in the details and I have not had a chance to read the details yet, but in principle I think this is a good thing. There are certainly plenty of predatory actors in the investing business- along with plenty of very good honest ones.

Thoughts?

Hotstreak

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #1 on: April 06, 2016, 11:38:10 AM »
Fiduciary responsibility is a Huge Deal, and if this rule change goes in to effect there will be a big change in how these accounts are handled.  I wonder if it will really be cheaper in the long run, though.  If brokers can't make large commissions selling mutual funds, they may switch simply increase their management fee to make up lost revenue. 

pdxbator

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #2 on: April 06, 2016, 11:52:28 AM »
This is excellent news for the consumer.

Mr Dorothy Dollar

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #3 on: April 06, 2016, 12:41:50 PM »
I think it will do little to no good for these reasons:

1) Advisers will just limit products they sell to those that have high commissions and most likely the same rate therefore one fund over another does not matter and they can suggest the best but the adviser will get paid and the selection of the fund from the selection does not run counter to the client.

2) The disclosure will be included in small font buried in the buy orders right next to the arbitration clause. Disclose in a hidden way next to a damage limiting clause and move on.

3) Because of the money in politics regulations have become ineffective either from weak drafting, weak fines, or lack of funding from Congress. If this rule was really going to change much it would never have been approved as Congress would have stopped it with a law or cutting funding.

In sum the spirit of the rule is welcome however the spirit will never be implemented.

NorCal

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #4 on: April 06, 2016, 01:07:58 PM »
I'm torn on this one.  I absolutely hate the business model of most financial advisors.  The conflicts of interest lead to lots of bad advice.

However, on the flip side, it is true that most financial advisors will either go out of business, or price their services in such a way that new savers won't get financial advice at all.

I'd generally rather see people going into high-cost funds than not investing at all. 

johnny847

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #5 on: April 06, 2016, 01:08:53 PM »
I'm torn on this one.  I absolutely hate the business model of most financial advisors.  The conflicts of interest lead to lots of bad advice.

However, on the flip side, it is true that most financial advisors will either go out of business, or price their services in such a way that new savers won't get financial advice at all.

I'd generally rather see people going into high-cost funds than not investing at all.

You assume that they are in fact getting financial advice instead of a sales pitch.

ooeei

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #6 on: April 06, 2016, 02:22:50 PM »
What's to stop them from recommending their proprietary fund anyway?   As long as their high fee proprietary fund isn't identical to a lower cost one, I'm betting they can argue it's still the best choice.  Investments are never guaranteed, so who's to say their slightly modified fund won't outperform the competing ones and make up its fee in increased performance?

Bobberth

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #7 on: April 06, 2016, 03:05:31 PM »
There are many advisors who have voluntarily chosen to accept the fiduciary standard under the current rules that are making money. I don't understand why all of those who don't currently operate within that standard think it will be so bad for them - unless they are afraid their own business practices are not in the best interests of clients. Which I think says a lot about those who are against these rules.

The Fiduciary standard, while narrower than the Suitability standard, is still quite wide. You can still invest in active funds, annuities and partnerships and fall under the fiduciary standard.

NorCal

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #8 on: April 06, 2016, 04:55:38 PM »
I'm torn on this one.  I absolutely hate the business model of most financial advisors.  The conflicts of interest lead to lots of bad advice.

However, on the flip side, it is true that most financial advisors will either go out of business, or price their services in such a way that new savers won't get financial advice at all.

I'd generally rather see people going into high-cost funds than not investing at all.

You assume that they are in fact getting financial advice instead of a sales pitch.

I did get scammed by one of these guys when I was a 22 year old in the military.  I paid WAY too much in brokerage fees.  But on the flip side, as a 22yo, I was putting a big chunk of money into an IRA and a taxable savings account each month.  Yes, I was taken advantage of.  But I probably wouldn't have started investing or saving (particularly on a tax advantaged basis) at all for another decade if it wasn't for that sales pitch.

The realization that I had been scammed was actually a big part of the motivation that led me to an MBA in finance.

So yes, it was a bad deal.  But it still helped set me up with good money habits for life.  I'm still better off having paid those big fees than if I hadn't.

Hotstreak

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #9 on: April 07, 2016, 12:10:01 PM »
What's to stop them from recommending their proprietary fund anyway?   As long as their high fee proprietary fund isn't identical to a lower cost one, I'm betting they can argue it's still the best choice.  Investments are never guaranteed, so who's to say their slightly modified fund won't outperform the competing ones and make up its fee in increased performance?


For most financial services violations, the threat is that they will be fired if they don't follow them.  For most of these laws, it's the company that's realistically subject to punishment.  Heavy fines are the usual punishment.  The primary threat to actual advisors will be that they will get fired from Morgan Stanley or Chase Bank or wherever they work, since those institutions have entire departments of people making sure that they follow the law.

ooeei

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #10 on: April 08, 2016, 08:59:47 AM »
What's to stop them from recommending their proprietary fund anyway?   As long as their high fee proprietary fund isn't identical to a lower cost one, I'm betting they can argue it's still the best choice.  Investments are never guaranteed, so who's to say their slightly modified fund won't outperform the competing ones and make up its fee in increased performance?


For most financial services violations, the threat is that they will be fired if they don't follow them.  For most of these laws, it's the company that's realistically subject to punishment.  Heavy fines are the usual punishment.  The primary threat to actual advisors will be that they will get fired from Morgan Stanley or Chase Bank or wherever they work, since those institutions have entire departments of people making sure that they follow the law.

I get that.  What I'm saying is it's going to be almost impossible in a courtroom to prove that their fund is inferior to the competition's unless they're literally identical except for fees.  A few slight changes in the allocation and they can argue that they think their fund will outperform the extra cost of the fees. 

For example they can take a fund Vanguard has, copy it but change the allocations by 5% or so in a few areas, and argue their fund is not the same as the Vanguard one and uses all sorts of cutting edge analysis, and that's why they have a 1.5% fee instead of a .07% fee.  As long as no one else has a fund literally identical to theirs with lower fees, they'll be safe.

Hotstreak

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #11 on: April 08, 2016, 04:10:05 PM »
What's to stop them from recommending their proprietary fund anyway?   As long as their high fee proprietary fund isn't identical to a lower cost one, I'm betting they can argue it's still the best choice.  Investments are never guaranteed, so who's to say their slightly modified fund won't outperform the competing ones and make up its fee in increased performance?


For most financial services violations, the threat is that they will be fired if they don't follow them.  For most of these laws, it's the company that's realistically subject to punishment.  Heavy fines are the usual punishment.  The primary threat to actual advisors will be that they will get fired from Morgan Stanley or Chase Bank or wherever they work, since those institutions have entire departments of people making sure that they follow the law.

I get that.  What I'm saying is it's going to be almost impossible in a courtroom to prove that their fund is inferior to the competition's unless they're literally identical except for fees.  A few slight changes in the allocation and they can argue that they think their fund will outperform the extra cost of the fees. 

For example they can take a fund Vanguard has, copy it but change the allocations by 5% or so in a few areas, and argue their fund is not the same as the Vanguard one and uses all sorts of cutting edge analysis, and that's why they have a 1.5% fee instead of a .07% fee.  As long as no one else has a fund literally identical to theirs with lower fees, they'll be safe.

That's assuming the burden of proof lies with the investors, not the brokers.  This is out of my lane, but I think it's more likely the broker would need to prove their fund was as good or better for the specific client than Vanguard (in your example), or at least prove that they allowed the customer to choose between the funds, after properly educating them on each, without unduly influencing them.  My perspective comes from having experienced the changes in financial institutions and their regulators since the last recession.  That being said there's no way to know, since the rules are not in effect and this entire discussion is hypothetical.

undercover

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Re: Changes to law on fiduciary responsibility for advisors and brokers
« Reply #12 on: April 08, 2016, 05:43:31 PM »
Bottom line: never listen to anyone when spending your own money results in them making money at no risk to them. Do the research yourself and realize they're no smarter than you. Education is way more powerful than any change in the law.
« Last Edit: April 08, 2016, 07:10:00 PM by undercover »