Does $17 billion sound like a lot of money to you? It should. That’s how much in profits Wall Street stands to lose if a proposed rule in Washington is enacted.
All that has to happen to stop the rule…is nothing. The defenders of the status quo need only drag their feet hard enough. If they win, experts estimate that Americans will lose $17 billion each and every year out of their retirement plans.
It happened once before, just a few years back. Lobbyist stalling tactics in 2010 stopped a move toward a fiduciary standard. The big stock brokers are breaking out their checkbooks again to halt change.
Charley Ellis is a former chairman of the Yale University endowment, a former board member of Vanguard Group and author of the investing classic Winning the Loser’s Game. He has seen a lot of regulatory efforts come and go in his career.
Ellis now is a member of the Investment Committee of my firm, Rebalance. In a recent Baltimore Sun Op-Ed, co-authored by my Rebalance partner Scott Puritz, Ellis and Puritz argue that such opposition should be no surprise.
“You can hardly blame an industry for defending the status quo when it allows them to rake in $17 billion a year in profits that would otherwise be off limits,” Ellis and Puritz write. “But that narrow self-interest is by no means a compelling argument for the rest of us who lose those billions of dollars in the process.”
People need advice, they argue. Point taken, actual financial advising is worth its weight in gold. What’s not worthwhile is what you actually get at the usuriously high rates charged by most stock brokers and some financial advisors.
For instance, stock brokers not operating under a fiduciary standard can be paid on the side by any number of players in the market, including the very same funds that they recommend you buy. They don’t have to tell you that. The law does not require them to do so.
Actively managed mutual funds, meanwhile, have a lot to lose if these “pay to play” relationships are divulged. Fund managers know that 80% of large-cap stock funds underperformed their indexes over 10 years as of mid-2015, according to new S&P Dow Jones Indices data. That 81% of small-cap funds failed to beat, and that 93% of long government bond funds failed to exceed their benchmarks.
The funds realize perfectly well that there’s virtually no way to win after costs over the long run. So they pay stock brokers to talk up their “story” and get investors excited about the supposedly enormous profits to be had.
Wall Street game
It’s a rigged game, and everyone playing knows it — except the investor. As Warren Buffett once put it, if you look around the poker table and can’t spot the patsy, it’s you.
“The truth is that many U.S brokerage firms in the U.S. are designed to harvest maximum profit. It should come as no surprise that their business model won’t work in a world where they have to put the interests of retirement savers first,” Ellis and Puritz write.
The time has come for regulation that levels the playing field. Retirement investors need to know that their broker is in fact acting in their best interest, no excuses, no fine print, no games.
Anything less would be a shameful return to what already has been decades of unchecked abuse. America’s savers deserve better. You deserve better.