Cheaper financial advice: Will you get what you pay for?
If brokers had to put their clients' interest ahead of their own, those clients would pay more for financial advice and their investments, an industry group reported recently. A couple with $200,000 in retirement assets would pay roughly $460 more a year in additional fees.
The study was commissioned by the Securities Industry and Financial Markets Association (SIFMA), the group representing megabrokers and banks, as part of its effort to influence a forthcoming rulemaking from the Securities and Exchange Commission. The SEC is supposed to report to Congress before the end of January 2011 about whether it should require brokers to be fiduciaries - professionals who are legally required to put their clients interests ahead of their own. Currently, fee-only financial advisors are typically fiduciaries, but brokers are required to meet lesser standards: They simply have to recommend suitable investments, and can put their own interests above their clients, say by recommending more expensive investment choices that pay commissions, as long as they are suitable.
Investor advocates criticized the study. "It's so incoherent as to defy objective evaluation," Barbara Roper of the Consumer Federation of America wrote to the SEC. Knut Rostad, chairman of a financial advisors advocacy group, the Committee for the Fiduciary Standard, called the report "a fantastic mythology." But IRA Hammerman, SIFMA's general counsel, defended the study, which was performed by Oliver Wyman, a consulting company. "Retail investors deserve strong protections from a new uniform fiduciary standard without sacrificing choice of products and services or facing higher costs," he said.
The premise of SIFMA's study and position is that middle-income investors can get more affordable advice if they pay for it indirectly, through mutual fund sales fees and other commissions, for example. SIFMA also said that some investments, such as corporate and municipal bonds, are primarily traded through commission-charging brokers. It would be hard for savers and investors to buy those products if the SEC came down hard on commissions.
But most observers aren't expecting that. They believe the SECwill walk a fine line that doesn't eliminate commissions. The Labor Department recently moved to apply the fiduciary standard to more pension plan advisors, including brokers. Commissions wouldn't be prohibited, but would have to be collected only if they fit a client-first perspective and were fully disclosed. The SEC is likely to follow the Labor Department's lead, suggests issue-watcher Ed Lynch, a fee-only retirement plan advisor with Dietz and Lynch Capital.
But a fiduciary standard that leaned on disclosures of potential conflicts isn't really a fiduciary standard at all, says Rostad. "If disclosures become the answer to addressing conflicts of interest, the fiduciary standard hasn't been weakened, it's been removed," he said. Roper believes a disclosure-driven rule would offer existing brokerage clients greater protections, but "even if you improve the standard, you're better off going to someone who is paid exclusively by you to be an advisor."
Furthermore, the change in leadership in the House of Representatives means that instead of firebrand Barney Frank (D-Mass.) chairing the committee that will oversee these rules, it is likely to be Alabama Republican Spencer Backhus, who will be more focused on pushing the SEC to justify their rulemakings than to hurry them up.
Regardless of how these rules play out, the field of financial advice is moving away from a commission model to a fee-only model, anyway, says Lynch. He gave his clients the choice of how they wanted to pay for his advice, starting almost 20 years ago. "To a person, they said they wanted to pay flat fees," he says.
Consumers who want to do that can find fee-only advisers through the National Association of Personal Financial Advisors, or the Garrett Planning Network. They may pay more for the advice, but less for the investments, than the typical brokerage customer.
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