by Kyle Buffo
This April, a new rule designed by the Department of Labor (DOL) during the Obama Administration, known as the “Fiduciary Rule”, was to be set in place.
The rule has faced a lot of pushback in the industry but has garnered huge support from consumer advocates and financial experts (at least ones that don’t profit from high commissions). Now, however, the administration has announced that the implementation of the Fiduciary Rule will be delayed into summer, a signal that the rule could be watered down or thrown out altogether. Although this rule would impact all types of people, it would have a disproportionately wide effect on musicians. Since it looks as though these promised protections are being stripped away, now is the time to prepare yourself with a little knowledge to make sure your money doesn’t fall into the estimated $17 billion that American investors loose due to the lack of a “Fiduciary Rule”.
What is the “Fiduciary Rule”?
Before we get into what the “Fiduciary Rule” is, let’s take a look at what it’s meant to replace. Let’s say you meet a Financial Advisor, Financial Planner, Wealth Manager, Registered Representative, or whatever they feel like calling themselves, with the idea that they are going to help you by making great financial recommendations. With marketing and branding campaigns like “You Are In Good Hands” (All State) and statements like “Our advisors are ethically obligated to act with your best interests at heart” (Ameriprise Financial), it would be understandable that you would believe they are giving you advice that at least THEY believe is best for you. But you would be wrong.
The problem is that these companies make high integrity claims in public, but, once they are taken to court, they are very quick to purport that they do not owe it to their clients to put the clients interest before theirs. A PIABA report in 2015 explicitly lays out how firms state that their representatives are mere “salesmen” and have no explicit obligation to put the clients interest ahead of their own (which, let’s face it, the only “interest” the “salesmen” have other than making the sale, is to make a bigger one). That is because currently these advisors, who get paid by the big brokerage firms, banks, and insurance companies, only have to suggest products that are “suitable” (the product can’t be really really horrible for the client).
Not all advisors get paid by the big firms or make money using commission. Somewhere around 15-20% of advisors are “Fee-Only” meaning they ONLY get paid by their client and, therefore, are not beholden to any one company’s product. These advisors will never have the “if I suggest this product I make X, but if I suggest this product I make 2X, 5X, 10X” conflict that brokers often do.
Going back to what the DOL “Fiduciary Rule” would do, all retirement accounts (IRA’s, SEP IRA’s, 401k Rollovers, etc) would be no longer subject only to the “suitability” standard but subject to the “Fiduciary” standard (advisor must put clients interest first). That $17 billion number is representing how much investors lose each year due to this highly conflicted advice.
How does it affect musicians?
One of the most important retirement programs for American savers is the 401k. They are pretty amazing. But I’m not going to talk about them here as most musicians don’t care about 401k’s. Why? Because they can’t have one! As independent musicians (owners of your own small business), your retirement saving options are very different and much more complex than your neighbor with the W2 9-to-5 job and 401K. While those with a 401k typically are placed with simple, defined, low cost options and frequently a free 401k consultant, musicians often have to venture out on their own to search for one of numerous retirement programs and then sift through the thousands of investment options. Because of the complexities and options, musicians (and most small business owners) often need help.
Most musicians (and others in a similar financial position) tend to think they aren’t “rich enough” to have a financial advisor, and consequently, they often don’t go out and find one. Commission-based (suitability only) advisors have proven to be much more aggressive in selling products. Compared to fee-only advisors, they spend a lot less time doing actual financial planning or improving their education and more time marketing and prospecting their next sale. It’s extremely common for musicians’ first contact with a “financial advisor” to come from a commission-based advisor that uses old school insurance sales methods where THEY find YOU complete with the first hook of a “free consultation”. Then they come back for a second meeting with the exact same solution that 95% of all their clients receive (usually the one with the best payout). Or, you may get the cross-sell approach, when your car insurance salesmen adds on investment services and says “hey I just got my investment license too, want to buy some mutual funds/annuities?”.
Although not alone, musicians’ unique and independent business structure makes them much more dependent on the advisors they work with when compared to their peers that have a 401k. Current regulations enable these advisors to guise themselves as being “ethically obligated” to you but, in reality, the law is protecting them. Status quo makes it a real possibility that your “trusted” advisor may intentionally put you in an investment that isn’t good for you. Don’t you think we may need a change?
Why did Trump signal he is going to stop it before it starts?
I know, so far, this blog post has been pretty one-sided. There has to be some reasons for not wanting to adopt the “Fiduciary Rule”, right? I mean, other than it obviously would make it harder for the big financial institutions and heavy hitting financial salesmen to make as much money as they do now. Well, I’ve tried, but I can’t find any good arguments for not implementing the “Fiduciary Rule”. The only sounds bits you can find against adoption are from industry lobbyists that make silly, bombastic claims or use bogus, biased reports (that they paid for) to refute actual evidence.
The financial services industry tried creating its own statistics, but they have been proven to be extremely biased attempts to distort the discussion on the industry. One of the biggest lies purported is that the “Fiduciary Rule” will drastically cut down the services offered to investors. They say this is because without a “commission” option, small investors would lose access to financial advice. This would be true if the commission option was the only way that an advisor can charge. BUT IT’S NOT! It is just the way they prefer to charge because it is the most personally lucrative. If the rule was in place, they would just have to change the way that they charge and be honest with their clients. Are we expected to believe that advisors would just stop working if the rule was implemented? There are already huge segments of advisors that don’t accept commissions and simply get paid by their clients to give honest advice.
The Upside – You won’t get taken advantage of!
I, along with most consumer advocate groups, am disheartened by the move to delay and possibly kill the Fiduciary Rule. The silver lining to it? You are reading about it! This conflict of interest has been going on for a very long time, but at the same time, there are wonderful financial advisors who cognitively position themselves to be Fiduciaries because they want that level of responsibility and they want their clients to know it. Along with the recent pushback on the Fiduciary Rule; consumer advocates, fee-only advisors, and investors alike have been following the story closely and talking about it a lot. So even if the Fiduciary Rule gets scraped, way more people now understand that there are advisors that don’t put your interests first (brokers, insurance agents, fee-based planners) and advisors that do put you interest first (fee-only advisors). Hopefully, this will bring more public awareness to the issue, and investors can be more proactive in making sure their advisor’s interest is aligned with theirs.
Need to find an advisor? Use the information below to start your search. You now have the knowledge to be certain you are receiving fair and honest advice; use it!
- Look for the CFP® marks- It is the most notable recognition of excellence in the industry. In addition to having proven sophisticated planning skills through education requirements, testing, and experience; CFP® holders also take another oath to put their clients’ interests first.
- Specifically ask the advisor if they are required to act as a Fiduciary. If they make a face or start going into a long explanation- run! Any advisor that is required to act in your best interest loves to hear clients ask that question because that means the client did their homework. Additionally, they will be thrilled to share with you that they are a fiduciary.
- Don’t use just any site to find an advisor, make sure it is a well-respected high quality institution. There is a great article on how CNBC’s list of top fee-only advisors are mostly not fee-only. Here are some great websites for finding a truly fee-only advisor.
- NAPFA-National Association of Personal Financial Advisors. Great search engine of only registered and verified fee-only planners.
- XYPN-XY Planning Network is a network of advisors that meet strict guidelines including never charging commissions, holding the CFP® designation, ability to work remotely with clients, and not having asset minimums.