If anybody has the truly long view on retirement investing, it’s Vanguard Group Founder John Bogle. He has retired from his own firm but definitely is still in the fight, by his reckoning well over a quarter century now trying to get retirement investment advisors to do what they say and be legally bound to follow through.
That, in a nutshell, is the fiduciary standard. It’s backing up what most people assume retirement advisors do for them with regulation to make it so. As Bogle told Morningstar last year, the idea is not complicated, though it clearly has ruffled feathers on Wall Street.
“Retirement-plan investors — and, ultimately, all investors in their investing — need to have some assurance that their broker is putting their interests first, rather than putting his own interests first. And that’s what a fiduciary is and does,” Bogle said.
Now a fiduciary requirement, put forth by the U.S. Department of Labor, is about to become law. It’s hard to overstate the magnitude of such a positive change for retirement investors.
I spoke on this subject recently as a guest on the nationally syndicated radio program “Jill on Money,” hosted by CBS Senior Business Analyst Jill Schlesinger. Jill asked me to explain the meaning of “fiduciary” to her listeners, and I can’t think of a more apt description than Bogle’s. It really is doing what people expect you to do — put them first.
The problem is, stock brokers have no reason to do that. Rather, they are financially motivated to do exactly the opposite, to hide the obvious conflict of interest they have in selling you unnecessarily expensive investments.
As I told Jill, “brokers who buy client’s annuities, who buy them high-priced mutual funds are not held to that standard. They are held to a lower standard today called a ‘suitability standard,’ meaning if you’re a widow and I buy you a bunch of highly speculative tech stocks, you can sue me because that wasn’t suitable for you, but you cannot sue me for taking commissions on the funds I buy for your account.”
The reason stock brokers don’t want a fiduciary standard is incredibly simple. They talk about the rule being too complex — complexity Bogle has shrunk down to a single sentence — when the fact is they just don’t like what the rule means. It means they have to ’fess up to the actual cost of the investments they sell.
Those costs are tremendous, truly shocking. There are annuities that charge upwards of 8% in sales commissions. That’s huge, money taken right out of your account that will never compound in your favor.
Actively managed mutual funds aren’t much better, and they are rife with conflicts, too. What it comes down to is that stock brokers often are paid to recommend them. As Scott Puritz, my partner and a Managing Director at Rebalance, testified recently before a U.S. Senate committee, “regrettably, this is an industry built up on hiding fees and offering conflicted advice.”
If you know what those conflicts are in advance, no problem. But retirement investment advisors don’t explain and had no reason to explain, until the Department of Labor acted. The fiduciary rule is coming down any day now, realizing Bogle’s long-held view that a fiduciary standard is crucial for retirement investors, indeed for all investors.