The government, in its ongoing pursuit of punishing anyone in the financial services industry who seeks any type of financial reward (be it large or small), is once again ready to create rules and regulations that will benefit only large providers (who have the wherewithal to overcome the challenges and figure out ways to get around them) and hurt small financial advisory firms as well as small business owners. Not only will it continue to subject small business owners to an increasing amount of compliance challenges (and ultimately more attorneys’ fees), it will make life more difficult for the average investor or 401(k) participant. Once again, the only ones to benefit are lawyers and government administrators.
In February, President Obama urged the Department of Labor to move forward with changes it has proposed to the definition of “investment-advice fiduciary” under ERISA. This was based on the belief that the current rules allow advisors to direct investors to high fee accounts. Of course, the government expects that investment advisors and professionals should educate themselves about investments but provide their knowledge for free. In the future, advisors may choose not to be involved at all with defined contribution plans and to focus their skills on other assets of individual investors because they are allowed to charge for that advice. That, of course, will make it difficult for plan participants seeking some advice about whether to rollover their assets or leave them in the plan…..but thank goodness! At least the government will be saving them from paying a fee for any advice in that regards!
Let’s look at real life for small business owners and the advisors that assist them. Small business owners are generally juggling multiple hats. They have to keep their business running smoothly and make sure it is profitable. Most small business owners feel a responsibility to ensure that they keep the company afloat because they are responsible for the financial welfare of not only their own family, but also the families of their employees. Dealing with regulatory issues, especially around issues like healthcare and their retirement plans is realistically something they want to deal with only a few times a year. Most are willing to rely upon the advice of a trusted advisor because they don’t have the time (or desire) to fully educate themselves about the topic.
Realistically, when that small business owner gets ready to sell his business or retire, he or she is once again going to rely upon that same advisor, because they have developed a relationship of trust, to manage his or her assets in retirement. Not anymore!
Let’s also look at this scenario from the perspective of a plan participant. Spectrem Group moderates focus groups with plan participants on an ongoing basis. For many of the plan participants, they have developed what they define as a “relationship” with the advisor that may come to meet with them once or twice a year at the company. This is who they define as their “advisor” and who they will go to when they are ready to rollover their assets. Even at larger companies, many perceive that the person from their plan provider that comes to the company to meet with them or to host educational meetings is their advisor. They certainly plan on keeping their assets with that “advisor’s” company when they retire. Not anymore!
Of course, neither small business owners nor plan participants understand that their lives are about to get more complex. They don’t really believe that these advisors are evil because they happen to be giving them advice about their investments while in the plan, or about what financial firm to use for their retirement plan, and then ultimately are giving them advice on how to meet their financial goals once they take the money out of the retirement plan.
The concept of a fiduciary duty is a good one. While I support the concept of everyone acting in the best interests of the investor, I would argue that most advisors already believe they are doing so…and their clients also believe that their advisor is acting in their best interest. When we ask investors if they know what a fiduciary is….many claim they know….and go on to say their advisor is a fiduciary….even though based upon the type of advisor they have, those of us in the industry know that person is not a fiduciary.
I support everyone acting as a fiduciary, if the government does not become overly engaged in making the process laborious. Heaven knows they won’t really be able to monitor it (they can’t even find their own internal emails!).
What is laborious and not helpful in the real world is the rule about parties in interest. The parties in interest rule works for large institutional investment managers. It works for preventing large wirehouses from pushing their own products. It doesn’t work for the day-to-day world. A financial advisor in a small town or city needs to be able to help the small business owner with finding a retirement plan, rolling over his IRA and selling his business. The 401(k) plan participant in a small business in Bismarck needs to be able to have the same person who conducts the employee education meeting at his employer’s business also be available to help with his or her IRA rollover. (And maybe to manage all of the bonuses he or she is getting while working on the oil fracking!) The government’s rules and definitions don’t work in the real world.
Here’s my recommendation. Each of these government administrators should take a month off of their day-to-day jobs and engage in what we call “ethnographic” research. Spend half of your time (2 weeks) with a few small business owners, 2 weeks with an advisor. Pick a smaller town or region. Not on the East coast. Check out the real world in Peoria, Illinois, or Des Moines, Iowa, or Cheyenne, Wyoming. Then talk to some real people and ask how they receive financial advice. They (the government administrators) can then return to their real jobs (no one will even have noticed they were gone) and propose regulations and rules that make sense.
Oh…and one more thing…compare the number of lawsuits brought against advisors for misconduct versus the number of individuals as a whole who have received advice. See any patterns? The vast majority of advisors are trying to work in the best interests of their clients. Let’s not make it too difficult for them.