The home of capitalism and the land of the free is moving to place greater controls on what financial advisers can and can’t do, and what they can and can’t say to clients. The US Department of Labor (DoL) this week released details of a new rule designed to make financial advisers genuine fiduciaries and to significantly reduce (if not eliminate) conflicts of interest in retirement planning, and requiring advisers to act in the best interests of clients.
To an Australian financial planner, none of these ideas are new or revolutionary. Not any more, anyway, but you don’t have to think back too many years to recall how many advisers squealed like stuck pigs at the prospect of reforms proposed in the Future of Financial Advice (FoFA) legislation.
Australia has moved on from questioning whether financial planners should be fiduciaries, whether clients’ interests should be placed first and whether conflicts should be eliminated – the answer on all these issues is a resounding “yes” – and is now starting to debate how deeply conflicts are embedded in planners’ business models – asset-based fees, for example – and what to do about them.
In some quarters there is a simple answer: authorised representatives of CPA Australia Advice, for example, which is expected to be up and running in the new financial year won’t charge asset-based fees, joining members of the Independent Financial Advisers Association of Australia and others in determining remuneration on a clearly non-conflicted basis.
Just starting out
Meanwhile, back in the US, they’re just starting out on this journey. The proposed introduction of the new DoL rule dates back a little over 12 months, to when President Obama called on the Department of Labor to “update the rules and requirements that retirement advisers put the best interests of their clients above their own financial interests”.
“It’s a very simple principle: You want to give financial advice, you’ve got to put your client’s interests first,” Obama said. “You can’t have a conflict of interest.
“This is especially important for middle-class families who can’t afford to lose even a penny of the hard-earned savings that they’ve put away.”
The White House produced an information paper, and set up a consumer website to explain its thinking.
The information paper concluded that conflicted advice cost US consumers about 1 per cent a year of the value of savings held in individual retirement accounts. Based on a pool of US$1.7 trillion ($2.3 trillion), that is equivalent to US$17 billion ($23 billion) each year.
The essential finding
Even if the estimates were a bit off, the paper stressed it “should not mask the essential finding of this report: conflicted advice leads to large and economically meaningful costs for Americans’ retirement savings”.
The response was completely predictable – it came straight out of the corporation self-interest playbook. If conflicts were eliminated and clients’ interests put first, then thousands of advisers would go out of business – and that’s not good for anyone, including consumers. The new rule would price advice out of the reach of the average consumer (in this case American ones) – and that would likewise be self-defeating. And it would also play into the hands of big players in the advice space, denying consumers choice and diminishing competition.
“There are a lot of financial advisers who support basic safeguards to prevent abuse; but there are also some special interests that are going to fight it with everything they’ve got, saying that these costs will skyrocket, or services are going to be lost,” Obama said.
If any or all of that sounds familiar, it should. It is almost verbatim the gist of the opposition to FoFA in its early days. And yet here we stand, some years after the event, and few can continue to argue that the impact of FoFA has not been positive. It did not go as far as perhaps it could have done – the architect of the laws, Bernie Ripoll, has acknowledged that it was about as much as the industry could deal with at the time.
Level the playing field
Announcing the new rule, Obama said the rule would level the playing field for “outstanding financial advisers” so they would not be at a competitive disadvantage for doing what they know is the right thing, namely, putting clients’ interests first.
And he had Australia in mind (see page 25 of the White House information paper) when he added: “Industry doomsday predictions have not come true in other countries that have taken even more aggressive action on this issue than we’re proposing.”
Read some of the early US reaction to the introduction of the DoL’s fiduciary rule.
