We’ve explored Standing Order No. 1 of the Funny Money column before, which is, “Always take free money.” This week we’ll bone up on Standing Order No. 2: “Whenever anyone in the financial services industry does anything ‘In order to serve you better,’ grab your wallet, your gas mask and a pooper-scooper.”
This brings us to the new rule issued by the Department of Labor that now requires any investment adviser handling retirement plans to adhere to the fiduciary standard. This is a confusing concept — the first time I heard someone say the word “fiduciary,” my immediate response was, “Gesundheit!”
What it means is that brokers and advisers now must put the client’s interest first.
In the past, as long as an investment was “suitable,” they could put their own high commissions or other incentives first, to the tune of excess charges of $17 billion a year to investors, according to a White House estimate.
That’s some very expensive and extremely convenient confusion on the part of investment advisers, if you ask me. But it does finally explain the paranoid approach banks apply to their office supplies — if you had people like that working for you, you’d chain down the pens, too.
So it’s an un-trust office?
This explains my big problem with certain segments of the financial services industry: Why is this the only service business in America that predicates its profits on ripping off its own customers?
Look, whenever somebody is trying to sell us something, we know to keep our guard up.
No, we don’t need Scotchgard for our vinyl patio furniture. No, we don’t need the extended warranty on this $7 shower head. And no, Ms. Rental Car Counter Person, I don’t want the infant seat at $5.95 per day for my son who, besides being 14 years old, happens to be standing right in front of you.
When it comes to services, however, most of us assume that the folks we hire are out to make us happy, get our repeat business and score referrals to all the neighbors.
The plumber, for example, doesn’t rig my toilet to flush an extra gallon so that he gets a kickback — sorry, “commission” — from the water department. And the lawn guy doesn’t try to snag an incentive payment from the seed company by bringing his dog along to kill my grass.
But your broker? Until now, he could rig your IRA to bleed commissions from you year after year in a way that diminished your total return by a staggering amount. On a $100,000 portfolio, the difference between an 0.25 percent commission and 1 percent commission would cost you $30,000 over 20 years.
And your banker still is allowed to trick the order in which your checks clear to maximize the number of $35 overdraft fees that hit when your account is short. And auto lenders and dealers are fighting to make sure they can inflate the rate of financing they offer on your next car, especially if you’re a minority.
For years, our financial regulators said all of this was — and much still is — perfectly kosher, as long as it was buried in the 32 pages of fine print you signed.
So it’s no surprise that the new fiduciary (Bless you!) standard comes not from the Office of the Comptroller of the Currency or the Federal Reserve or even the Securities and Exchange Commission.
Instead, it comes from the Department of Labor, which decided that while some men rob you with a handgun, it wasn’t going to stand by while others rob you with a disclosure statement.
OK, dis fee goes dere ...
Naturally, the people who’ve made billions under the old suitability standard think the new rules are outrageous, and threaten that, if they can’t rip us off, they won’t help small investors at all, leaving us to invest in our brother-in-law’s car wash or the Outer Slobovian Yak Futures Fund.
Not so, says Ray Ferrara, CEO of ProVise Management Group in Clearwater, Florida. As one of several thousand Certified Financial Planners in this country, Ferrara has worked under the fiduciary standard for his 44-year career, as do many other investment advisers. If the big brokerages want to walk away from a $17 billion-per-year market, he’s cool with that.
“My firm and 74,000 other CFP professionals will be more than happy to fill that gap for those investors that the industry doesn’t think it can serve,” Ferrara says.
Did I mention that Ferrara’s firm manages $1.2 billion in assets? So clearly, plenty of financial advisers are doing quite well, thank you, by doing right by their clients and acting as fiduciaries.
And that, folks, is nothing to sneeze at.