Fiduciary rule's critics cry wolf about hurt investors
(Bloomberg Gadfly) -- It's early days for the Department of Labor's fiduciary rule, but its critics are already wagging their fingers and saying "we told you so."
The main thrust of the rule ― the requirement that brokers put their clients' interests ahead of their own when handling retirement accounts ― took effect on June 9. Advisors must comply with the rule's remaining requirements by Jan. 1, 2018, although the Labor Department sought last week to extend that compliance deadline to July 1, 2019, presumably to consider revisions to the rule.
There's no going back, however. The rule has exposed an intolerable conflict of interest: Brokers are paid by the mutual funds they recommend to clients. For many investors, that neatly explains why they've been sold high-priced actively managed funds that routinely fail to keep up with the market. And those investors have had enough, as evidenced by the huge flows to passive and low-cost funds in recent years.
Wall Street has received the message, and it isn't waiting around for the Labor Department. Brokers are paring high-priced funds from their mutual fund offerings to retirement savers. They're also moving those investors from commission-based accounts ― which charge a fee for each transaction ― to fee-based accounts, which charge an annual fee based on assets.
The rule has cost the firm tens of millions of dollars in compliance and lost revenue.July 26
Critics point to those changes as proof that retirement savers are paying more and have fewer investment options. Ronald Kruszewski, chief executive of Stifel, told the Wall Street Journal last week that assets are growing in Stifel's fee-based accounts "primarily because of DOL," and that such accounts can be twice as costly for clients.
Investors may be paying more at Stifel, but there's a good chance they're paying less elsewhere. It's true that money managers charge more for fee-based accounts than commission-based ones. But most fee-based accounts are held to a fiduciary standard, which means that the mutual funds and ETFs in those accounts must be reasonably priced. In other words, what investors pay in higher account fees is more than likely offset by lower fund fees.
It's not even clear how much more retirement savers will ultimately pay for fee-based accounts. There's growing pressure on both funds and money managers to reduce those fees. According to the Journal, Merrill Lynch has already given its "more than 14,000 brokers more flexibility to cut fees" for clients who move to fee-based accounts. I suspect other firms will follow.
It's also worth noting that many brokers are preserving commission-based accounts as an option. Morgan Stanley is lowering its commissions and rolling out a robo-advisor. Merrill Lynch is already offering discounted brokerage and low-cost automated investing. And don't forget about all the other discount brokers and robo-advisors already available to investors.
The argument that retirement savers have fewer investment options is also a red herring. Consider that, according to Morningstar data, there are 122 actively managed U.S. large-cap blend A-share mutual funds with 10-year track records. Their average expense ratio is 1.11% annually, and that doesn't include sales charges, or loads, to buy and sell the funds. That's at least 20 times more expensive than an S&P 500 index fund.
Consider, also, that just six of those 122 funds beat the S&P 500 over the last 10 years through July, net of all fees and expenses. Are retirement savers worse off if fewer of those funds are available to them? I don't think so.
I'm not suggesting that the rule shouldn't be open to debate. Many brokers support a fiduciary standard, for example, but worry that the rule's compliance provisions are unnecessarily burdensome. Robert Seawright, chief investment and information officer at Madison Avenue Securities, a dually registered broker and fiduciary advisor, is one of them. He says that the rule is "costly and difficult to implement, particularly for smaller firms without lots of resources. The rule as currently in effect, which requires reasonable fees and prohibits misleading information, largely gets the job done without a lot of unnecessary bureaucracy."
On the other hand, Barbara Roper, director of investor protection at the Consumer Federation of America, pointed out by phone that "compliance with the fiduciary rule is hard because the conflicts are so pervasive and reining them in is a big job, not because the rule itself is so complex."
By all means, let's have a robust discussion about how to improve outcomes for investors, but let's stop inventing bogus reasons why we shouldn't look after their best interests.