Last Week Tonight with John Oliver has, in my opinion, a great track record for showcasing forgotten or ignored issues that defy common sense, and then ripping the systems that create or sustain them to pieces with blue comedy that still manages to be charming thanks to his British accent and the fact he looks like a grown-up version of Harry Potter. This week was no exception, as the show tackled the financial industry and the Department of Labor’s newly passed “Fiduciary Rule”.
If there is one criticism I have of the piece, it’s that is starts with clips of Suze Orman, the queen of financial entertainment. I could write a whole blog post about why I believe she is a charlatan and a megalomaniac (hey, she has all the makings of a presidential candidate), but I digress.
Oliver proceeds to show a few clips of television commercials from the financial advisor industry, including a JPMorgan Chase advert that shows a client inviting his financial advisor to a wedding. His response to the absurdity of this notion is the title of this here post.
He then points out that the Financial Industry Regulatory Authority (FINRA) warns customers to “…be aware that Financial Analyst, Financial Advisor…, Financial Consultant, Financial Planner, Investment Consultant, or Wealth Manager…are generic terms or job titles, and may be used by investment professionals who may not hold any specific credential.”
He goes on to criticize brokers that push annuities and other commission-based sales products, saying correctly that generally it is currently legal for them to put their own interests in front of their clients’. He does make a point to say that fiduciary investment advisors — like yours truly — are different and do have to put the best interests of their clients first. Which he finds a bit weird saying, “it’s like finding out that only some restaurant waiters are forbidden from ejaculating in your soup. Hey, why is it up to me to ask you which kind you are? I’m sending this chowder back!”
These are all topics I covered with somewhat less colorful language in my “Five Signs Your Broker is a Dick” post from last year.
Beginning next year, the DOL will require financial advisors to operate under the fiduciary rule when dealing with retirement accounts, and broker-dealers are none too happy about losing their right to rip clients off. Prior to the passage of the rule the industry had been shamelessly trying to win over public opinion with ads, essentially trying to convince the public it was in their best interest to continue to allow financial advisors to not act in their best interests. This ridiculous commercial by Americans to Protect Family Security practically jumps out of the screen and says, “we think you are all gullible morons!”
The ads being unsuccessful, they have now moved on to phase two: suing the government. Now a brokerage firm like Edward Jones or an annuity provider like New York Life isn’t going to go right out and file the lawsuit themselves. That would make it all too obvious to their clients that they are fighting to protect their ability to screw them. Instead, the lawsuits are being filed by trade groups including the Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute, and the Securities Industry and Financial Markets Association. The show falls short of naming names, but if you care to know who funds these groups have at it:
https://www.financialservices.org/sponsorship/
http://fsroundtable.org/members/
http://www.irionline.org/membership/iri-board-of-directors
http://www.sifma.org/broker-dealer-members/#T
Sure, sponsoring these groups doesn’t necessarily mean a company recommends or endorses this particular initiative, but they are funding it nonetheless.
Traditional brokerage firms are arguing the new rule will make it more expensive to provide advice to the consumer. Which is probably true for some, as they will be be subject to far more lawsuits for doing the wrong thing for their clients. But I don’t think that putting clients’ interests first is more expensive. Rather, not taking advantage of your clients is simply not as lucrative. According to the Obama administration, imposing a fiduciary standard on advisors to retirement accounts would save investors about $40 billion over the next 10 years.
The piece closes with a mock investment commercial with five tips for everyone, which follow along with my comments.
1. “Start saving now. In fact, start saving ten years ago. Invent a time machine, use it go back and start saving money! Then, kill baby Hitler.” No arguments there.
2. “Low-cost index funds. Average people like you — and let’s face it, you’re very, very, average — should probably just invest in low-cost index funds and leave it alone. You should check on it about as often as you Google whether or not Gene Hackman is still alive. About once a year.” The nice thing about this advice — besides keeping expenses low — is that it alludes to the behavioral pitfall known as myopic loss aversion by telling you to only look at your statement about once a year. Myopic loss aversion pertains to an investor’s reluctance to hold more volatile investments like stocks because they are evaluating their decisions over excessively short time periods. In other words, by looking at your account too frequently you allow your mind to narrowly frame the outcomes of your investment decisions over days, weeks, and months instead of broadly framing them over your actual time horizon which is typically years or decades.
3. “If you have an advisor, ask if they’re a fiduciary. If they say ‘no’, run! What the [expletive deleted] is a fiduciary?” A fiduciary advisor is required to put their clients’ interests above their own. In some ways the law hurts fiduciary advisors like me as it will somewhat diminish our ability to differentiate ourselves in the market. I’m sure we’ll survive.
4. “As you get older, gradually shift your investments from stocks to bonds. Here’s a way to remember it: every time they pick a new James Bond, gradually switch more of your stocks into bonds. Then go back to wondering if Daniel Craig is actually attractive.” This is a good rule of thumb, but everybody’s situation is a little different so I wouldn’t be so bold as to give blanket advice. Daniel Craig, however, does not look like a blonde chimpanzee in a tux.
5. “Finally, try to keep your fees like your milk, under 1%, because just like interest compounds, so do fess.” Agreed. I’m amazed there are still advisors out there that get 5.75% loads for selling a mutual fund, or 2.0% or more per year for managing a client’s assets.
“One last tip, don’t forget to die.” Longevity risk, another good point.
