There is an adage that it is more profitable to give advice than to receive it. Unfortunately in the world of financial planning and investment advice, this very often is true. If President Donald Trump and others in Washington, D.C., get their way by weakening or repealing a provision called the fiduciary rule, the murky world of fees and financial advice is likely to become even more opaque.
The fiduciary rule had been scheduled to go into effect April 10 until Trump called for a review of it, leaving its future uncertain. The rule states that financial advisers or those selling investment products have to act in their clients’ best interest instead of their own or their firms’. Its purpose is to protect the interests of people saving for retirement, a child’s education, the purchase of a new home or any other financial goal from the unscrupulous behavior of certain financial planners, investment advisers and investment product salespeople.
As it stands, not everyone dealing in financial advice and investment products is required to act in a fiduciary capacity, which an adviser or salesperson can legally recommend products that might not be in their clients’ best interest. Some of these products — certain annuities, various types of life insurance contracts that are intended to act as investments, some mutual funds and certain types of more elaborate and often illiquid investments such as real estate investment trusts and shares of limited partnerships — may pay the person who recommends them a hefty commission, but they might not be in that client’s best interest. Very often they are not.
A 2015 report found that biased investment advice annually costs American investors $17 billion. It is no surprise where this money goes: to the underhanded advisors themselves and to the behemoth financial industry. This represents a massive transfer of wealth from ordinary Americans to many of the same large financial institutions whose dubious actions and fleecing of investors helped lead to the 2008 financial crisis. These financial institutions advocate for the elimination of the fiduciary rule because it will cost their firms a significant amount of revenue that they collect in the form of excess fees and commissions if it is not repealed or significantly weakened.
Fees on an investment are like a leak in a gas tank. The leak may be difficult to notice and at first might not even seem like a significant problem, but over time the amount that drains away ends up representing a sizable portion. A 1 percent annual fee can erode 25 percent of an investor’s balance over the course of 35 years, and many of the more egregious investment products out there have fees that are even greater than that amount.
There is no evidence to suggest that investments with higher fees earn greater rates of return than investments with lower fees; in fact, the inverse is very often true. Moreover, many high-cost investments — some types of annuities — also have harsh withdrawal penalties and adverse tax consequences based on the type of distribution that is taken, so people can find themselves stuck in something that is inappropriate for them with little recourse to change paths.
Some onus of responsibility needs to be with the individual investor to understand the fine print on any investment product, but a skillful yet dishonest adviser, who occupies a position of trust, can easily de-emphasize these concerns and make an investment seem better than it really is. Many people giving professional financial advice are more like salespeople than advisers, and a commission-based compensation structure only reinforces this.
There are many wonderful, worthy and responsible financial advisers out there, including right here in Maine, who provide immense help to people organizing their finances and making investment decisions. But there are others who care more about their own commissions than their clients or have convinced themselves that the products that pay them the most also happen to be best for their clients. As this is generally not true, ordinary Americans need some sort of recourse and protection. Otherwise billions of dollars will continue to be syphoned out of the accounts of hardworking Americans in the form of excess fees and commissions.
The investment world is complex and can be emotionally jarring, which is why people seek advisers in the first place. The creation of the fiduciary rule was an appropriate measure to reign in the inappropriate behavior and biased recommendations of certain advisers and salespeople. It should be preserved and implemented as intended.
Ben Sprague is a Bangor city councilor and a former financial adviser.