“Obama Targets Financial Advisers” — a WSJ editorial full of nonsense

 

Today’s WSJ Editorial.

For the record, we at Meyers Wealth Management do NOT agree with the editorial.

We have no opinion about HOW the Obama administration is going about this — legal procedures, etc.

But the notion that someone who calls himself a “financial adviser” can do so without being subject to a fiduciary obligation to the client is nonsense.

Perhaps the problem is the term “financial adviser” — which suggests that the adviser is selling advice. 

Nobody goes to a car dealer to consult with a “transportation adviser” and neither does such a person expect that the car dealer is going to look over all the client’s situation, needs, finances, etc and come up with a recommendation which happens not to include selling that client a car.  Because the car dealer’s business is selling cars.

So, too, is most of the financial industry dedicated to selling financial products, and the compensation model matches that reality.  But the public is not told this.  The fees and commissions earned by the salespeople can be huge and are almost never disclosed to the clients.  

And this needs to change.

It’s certainly possible to get great advice as part of someone selling you a product.  But given the choice, wouldn’t you prefer to know that the advice you are being given is independent of the product?  

As for the nonsense about hurting middle-income investors, if the only way they get their advice is incidental to being sold high-expense funds or incredibly complex variable annuities with huge hidden commissions for the salesperson, (a) are they really getting advice? and (b) the idea that they have no other source of advice is simply flat out wrong.

The editorial pretends that the only fee-only alternatives for those middle-income investors are the robo-advisers (because, as you can see, they claim that with “small accounts” these folks won’t qualify for the high-miminum fee-only financial planners and investment advisers out there.)

And that’s wrong.  There are folks who offer fee-only financial planning on an hourly basis.  There aren’t a lot, partially because the industry is dominated by commission/sales oriented “advisers” (seriously, “adviser” is just not the right word for it).  But they are there.

We know.  Because we do it.  Meyers Wealth Management offers hourly planning services on an as-needed (and as-available) basis.  

Don’t fall for the nonsense.

Obama Targets Financial Advisers
Aug. 16, 2015 6:22 p.m. ETThe Obama Administration may have only 17 months to go, but that’s still enough time to do plenty of economic damage. Witness Labor Secretary Tom Perez, who is rushing through a new regulation for financial advisers that isn’t needed, that he lacks clear legal authority to impose, and that will hurt the very people it is supposed to help. Other than that, it’s a splendid idea.
For decades brokers and other financial advisers have operated on a commission model in which they get paid a fee when customers buy or sell securities. Mr. Perez sees this model as thieves exploiting investors. So his proposed rule would apply a fiduciary standard that currently applies to money managers to advisers who merely sell financial products (such as advising to open a rollover IRA account).
Mr. Perez says the rule is needed to protect Americans from advisers who are pushing stocks and mutual funds to gain fat commissions but may not be best for the customers. In practice the new standard will raise costs and limit choices for people of modest means who need financial advice.
It will do this by effectively killing the commission model for middle-income investors. Customers will need to sign a complicated contract before they receive any advice, which some say will make giving financial advice over the phone unworkable.
The financial-services firm Primerica says the rule “will be particularly devastating for those with less than $25,000 to invest, which is the lowest required minimum investment for a fee-based advisor we could find.” These small investors will face either higher fees they cannot afford or letters from their financial houses saying they will have to get their financial advice on their own. About 45% of Americans have accounts with less than $25,000, according to the Employee Benefit Research Institute.
Mr. Perez has suggested in hearings that customers can receive robo-advice instead. Seriously. We’re not sure we trust Siri of iPhone fame as a stock picker. We’d prefer the flesh-and-blood adviser who may have been recommended by a friend.
When Labor first proposed the rule in 2010, it was forced to back down amid bipartisan howls in Congress. Democratic Sen. Claire McCaskill (Mo.) says it will eliminate advice “for all small employer plans under 100 participants.” In the House, a bipartisan group told Mr. Perez they fear his rule would divide the industry “into those who can afford an advisor and those who cannot.”
The legal justification is even flimsier. In Dodd-Frank, Congress specifically gave the Securities and Exchange Commission the authority to set a fiduciary standard for brokers and investment advisers. But Mr. Perez says Labor has the authority because many retirement accounts are issued to workers through employers—and Labor already regulates employee benefits under the Employee Retirement Income Security Act (Erisa). Never mind that the expansive definition of fiduciary he seeks is at odds with the language of Erisa.
SEC Chair Mary Jo White hasn’t directly criticized Mr. Perez, but this spring she said the SEC is working on its own rule. And Daniel Gallagher, a Republican on the SEC, says in a letter to Mr. Perez that the rule will “harm investors plain and simple.” He adds that, “It is clear to me that the DOL rulemaking is a fait accompli and that the comment process is merely perfunctory.”
Labor held hearings last week, and there is now another comment period. But the understandable worry in the financial community is that the hearings were a pro forma effort to cite when Labor has to defend against the inevitable legal challenge once the rule is final. Mr. Perez is determined to push through the rule before he leaves town, and you can add its costs to the list of reasons that economic growth is slower than it should be.

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