” Vested interests have never been known to have willingly divested themselves unless there was sufficient force to compel them.”
– B. R. Ambedkar

Financial Reform or Regression? The Battle Over Dodd-Frank Provisions and Fiduciary Vs. Suitability StandardsIn 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act provided meaningful (if imperfect) reforms in an attempt to insure that the financial meltdown of 2008 would be the only of its kind. In addition, the bill authorized the SEC to enact a rule that would require all financial professionals – whether brokers or planners or advisors – to operate from a fiduciary standard, free of conflicts of interest. However, aside from hot debates, little has actually been done towards such an end. Now the Department of Labor is being tasked with the job, amidst renewed debate and much opposition.

The expansion of the fiduciary standard is not the only element of the Dodd-Frank legislation that is under attack. Nearly 5 years after its passage, Wall Street has done everything possible to undermine and unravel meaningful protections for Main Street investors. Restrictions preventing the financial recklessness that led to the 2008 crash are slowly being rolled back or de-clawed.

The Battle in Congress

It’s no secret that special interests hold enormous sway on Capitol Hill. And according to OpenSecrets.org, which tracks political funding, the securities and investment  industry “has become the single largest source of political contributions” in the United States. The industry spends over $98 million a year in lobbyists, and in the 2012 election cycle, it gave a additional $283 million to campaign contributions (the bulk now coming from individual donors in addition to PAC contributions.)

As a result, critical provisions drafted by financial industry insiders are finding their way into “must pass” bills before lawmakers. In December, the government funding bill was passed even though it contained provisions that eased Dodd-Frank restrictions on bank trading of financial derivatives — the type of complex investments that helped trigger the financial crisis.

In January, the House passed a bill, part of which delays Dodd-Frank’s requirement that banks sell off collateralized loan obligations by two years.  Not only does the bill allow big banks to continue holding high-risk loans, it would also ban regulators from requiring the banks to maintain cash balances as a buffer should they suffer losses in the markets due to investing in derivatives.

The bill was HR 37, known by the appealing title of “Promoting Job Creation and Reducing Small Business Burdens Act.” As the New York Times noted, “For all its sway in Washington, Wall Street is also widely reviled. So, one of the secrets to its success is wrapping itself around a friendlier cause.”

Next up, banking interests want to weaken the Consumer Financial Protection Bureau, which has been cracking down on misleading lending schemes. Another Wall Street priority is to let major financial institutions avoid being designated as “systemically important,” a status that subjects them to more stringent rules.

In spite of the intentions of the Dodd-Frank reforms, the banking behemoths have found ways to retain their risky behavior through careful, often misleading lobbying. The result? The too-big-to-fail institutions are the ones engaging in the very behavior that put them at great risk. According to the Office of the Comptroller of Currency, 95 percent of derivatives trading is conducted by five firms: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley.

The Battle for Public Opinion

A recent Wall Street Journal editorial, titled not-so-subtly, “Obama vs. Savers” announced that the White House aims to “take away choices for middle-class investors.” Do investors wish to be offered underperforming investments saddled with unreasonably high fees, choosing to knowingly line brokerage pockets as the result of conflicts of interests? Probably not.

An editorial in ThinkAdvisor.com from Knut Rostad, President of The Institute for Fiduciary Standard, offers an opposing view:

This Journal editorial is part of a raging battle in Washington between brokerage lobbyists and, well, most everyone else, over whether securities and insurance sales brokers should be regulated as professionals—like doctors—when they give advice. Or whether they should continue being regulated, as they are today, more like car salesmen. Brokerage lobbyists are fighting efforts to raise broker standards. They like being regulated like car salesmen.

Tackling the Journal’s points one by one, Rostad shoots down the claim that advice propelled by conflicts of interest doesn’t produce lesser results. “The idea that conflicted advice is good—for America and investors—is backwards on its face. It defies centuries of legal writings, the human experience and common sense. Yet this backwards view of history and law is the intellectual foundation of the anti-fiduciary campaign.”

The Battle Over Fiduciary Vs. Suitability Standards

Two years ago we published an article on “Suitability Vs. Fiduciary Standard: Who Should Give Financial Advice?” In it, we described the raging debate since the 2010 Frank-Dodd bill authorized the SEC to adopt a fiduciary standard, which means “the best interest of the client” versus the current suitability standard, which only means “appropriateness of investment.”

The intention of expanding the fiduciary standard is clear and simple – anyone who gives financial advice should do so according the best interests of the client, or they shouldn’t be in the business of giving financial advice. The reality of such a move may be more complicated, however. Will an across-the-board fiduciary standard block investors from crowd-funding? Could it compromise investor choices with self-directed IRAs? Would it prohibit 401(k) plan participants from receiving rollover advice without paying a fee to do so?

It’s difficult to say what the unintended consequences of such a change might be, and there will inevitably be problems that need solving. Or perhaps, such concerns and objections are simply further examples of Wall-Street -born fear-mongering, designed to rally support against anything that would actually protect the average investor from abuses and conflicts of interest.

The Battle of Britain

Critics of mandating fiduciary duty say that it will limit choices for less-wealthy Americans who can more easily pay commissions that financial planning flat fees. However, regulations limiting unreasonable fees seem to be working – and saving citizens money – in other countries.

In the U.K., annual charges on British workplace pension plans with automatic enrollment were capped at 0.75 percent in 2013. And interestingly enough, the proposal to do so did not come from the left-wing Labour party, but rather, the conservative Tories, As a BloombergView article explains,

The conservative party has figured out that shortfalls in retirement savings ultimately will be picked up by the government. Pensioners — who like their U.S. counterparts vote in greater numbers than the young — won’t tolerate an impoverished retirement. Hence, high pension fees today simply mean higher government spending in the future.

And that means tax increases.

I wish that U.S. fiscal conservatives understood the obvious reasoning behind this. 

The Battle for Your Dollars

In contrast to the fees paid by British workers, an unreasonable amount of money is drained from 401(k)s and other qualified plans by combined qualified plan, management, and other fees that can easily add up to 2.5% per year. And while “2.5%” might not sound like that much, consider that these fees can be imposed on automatically enrolled employees receiving little to no financial “advice” and, due to the compounding nature of costs,  can add up to twice the original contributions of the plan participant over the life of a retirement account!

I illustrate how fees as well as taxes drain a retirement account in detail in chapter 6 of Busting the Retirement Lies, “The Reality of Retirement Plans.” But over-inflated fees are just one of the many problems represented by “typical” financial advice, whether it’s coming from fiduciaries or brokerage salespeople operating under a suitability standard.

In all cases, the fundamentals of financial planning are simply flawed.

From retirement strategies that simply don’t add up in light of longevity and inflation to the impossibility of predicting Wall Street returns as well as life events, there are multiple problems with typical financial advice. For these reasons and others, we have chosen to not only operate under a fiduciary platform, but to operate according to the principles of Prosperity Economics, an alternative to typical financial planning.

We believe that you shouldn’t be handing over your dollars to mutual fund managers or placing them behind a wall of government rules in the first place. Prosperity Economics increases the control you have over ALL of your dollars, not just the ones that aren’t paid out in fees. 

Who’s Giving You Financial Advice?

Unlike brokerage firms, Registered Investment Advisors and other providers of fiduciary advice are bound to give advice that is in the client’s best interest, regardless of whether it makes the financial advisor/ representative/ planner the most money. (And isn’t that the only kind of financial advice you would want?)

When clients ask if we operate from the fiduciary platform, we are proud to be able to answer “Yes!” Partners for Prosperity, LLC is a Registered Investment Advisor, and unlike many financial representatives, who are essentially salespeople for financial corporations that sell mutual funds and other financial products), we are licensed to give financial advice and have the ability to charge fees for our own financial advising process.

Whether we actually charge fees or not depends on what a client needs and wants and also the time commitment required from us. A member of our team would be happy to talk with you to help you determine the best way to work with us.