This week the Labor Department announced new rules proposing that advisors must take fiduciary responsibility when working with tax deferred retirement accounts. This move was almost immediately condemned by Wall Street firms as an overreach of an already meddling government. To get on the record, my response as an owner of a financial advisory firm “It’s about time, what have you been waiting for?”

If you have spent any time reading through our website you will have undoubtedly realized that I am a heavy advocate of advisors doing the right thing. As a fiscally conservative, socially middle of the road and active commentator on politics I would have liked to see the industry move itself towards treating clients with some respect. But investing is an inherently complicated beast; and that complication has allowed for bad investment advice to be the industry norm rather than an occasional problem.

Investment Advisors Need to Be Held to a Better Standard.

Investment Advisors Need to Be Held to a Better Standard.

I don’t want to just casually mention how horrible it is for most investors out in the marketplace. If you are an investor with greater than $1 million under management, it is highly likely that you found your way to an independent registered investment advisor who already has agreed to be a fiduciary on your account; and thus, you don’t really have much of an issue. But if you have less than $1 million stuffed away, chances are you found your way to a broker or investment advisor who is charging you more than twice what they say they are. On our website’s homepage we have a link to a study which found that most investors, primarily those with under $100k to invest, are using brokers charging loads and fees in excess of 5% annually. Charging these absurd fees to a client should be criminal: and I don’t mean fines…I mean jail time.

At every investment firm for which I have ever worked there has been weekly meetings (food provided) where a manager or consultant explains why some fund or another needs to be included in our line-up. These companies have offices here in the North Shore and make trips around Highland Park, Northbrook, Deerfield and the other burbs hitting up any investment advisor that will listen. Almost 100% of the time these funds are massively expensive actively managed funds. We would be told why this fund would solve some problem with our line-ups and that the our firm and the investment provider would be able to do this or that for us. What was really happening was something referred to as “revenue sharing.” Revenue sharing is a way for investment firms to backdoor fees. The mutual fund may charge a “marketing fee” or 12b-1 fee; that money goes to the advisor in addition to any fee charged for the advice. This is double-dipping clear and simple.

I certainly understand why companies that employ brokers are worried. Merrill, Morgan, Schwab, and other regional brokerages have barely been breaking even the past half decade. The vast majority of all advisors and certainly those with any experience and knowledge have left and gone independent. What is normally left at the larger brokerage firms are those advisors still learning the business, or Managing Directors and partners who are benefiting from the deception.

Don’t be fooled, all of the rhetoric you are going to hear about reporting requirements to multiple agencies and a government overstepping their mandate is just that…rhetoric. As the principal of an investment advisory I am in charge of this reporting. If a firm is putting the interests of clients first then the reporting is simplistic and very straightforward. If a firm is trying to conceal fees and overcharge clients, then the reporting must be incredibly difficult; as it should be.

The new rules don’t bar firms from these back door payments. But if challenged legally the firms would need to justify the expenses and investment as “In the client’s best interest.” I don’t feel that the regulation goes far enough. At the very least I think that the backdoor payments should be fully disclosed to clients in some sort of standard easily understandable fee calculation. But that is for another day.

Clients deserve better guidance. They deserve to know exactly how their money is invested and who they are paying to do the work. Advisory firms should be on the hook if they abuse the trust their clients put in them. If you see a politician speaking against this type of regulation I would immediately question from where his or her campaign money flows. Again I do wish that the investment industry would have self regulated through competition, but it has not. My only worry with this Department of Labor move is that my firm may have increased competition if the big boys are forced to do the right thing.

Story By: Adam Faust, Founder Deep Blue Financial