A couple of years ago, I spent an inordinate amount of my time on Capitol Hill talking to lawmakers about a new investment rule in the works designed to expose hidden fees charged by stock brokers.
Called the fiduciary rule, it was meant to protect the millions of Americans who rely on a financial advisor they trust.
Investors lose $17 billion a year to investment fees that are nearly impossible to understand. Too often, people are sold costly products by salespeople paid to look the other way.
Stock brokers and other retirement advisors have the best of both worlds. They get paid by the client and by the seller of the mutual fund.
Whether the fund is the best choice for the customer or not isn’t relevant. All it has to be is “suitable.” In fact, the practice is called the suitability rule.
Essentially, suitability means don’t sell volatile microcap stocks to a grandmother. And don’t sell sleepy municipal bonds to a 20-year-old.
That’s a policy loophole you could drive a truck through! And many stock brokers do.
Here’s how that works: A broker looks at five more-or-less similar mutual funds, say, large-cap stock funds.
Any one of the funds might be suitable for a client. Which to select? Why, the one paying the fattest commission, of course!
Those fees are big money to stock brokers and other retirement advisors, and the commissions they collect only jack up fund costs. As I testified in the U.S. Senate, the level of disregard for the client is stupefying.
Even more stupefying, representatives from the brokerages showed up to defend these practices.
Now a court case has sunk the fiduciary rule and the current administration has declined to defend it.
On top of that, Merrill Lynch seems to be talking about walking back its entire fiduciary rule policy, as my colleague Mitch Tuchman explains at MarketWatch.
Will Merrill follow through? It’s hard to say. How can you claim to be acting in your clients’ best interest and then, two years later, pretend those interests no longer matter?
Perhaps I’ll end up the Senate again, talking for hours to anyone who will listen about the fiduciary rule and the importance of putting the client first. I certainly hope not.