When I was a young advisor back in the 80’s, a broker at a big, reputable firm told me his chilling plan. He was building a big client book with blue chip stocks at the reputable broker, but planning to move to a “Wolf of Wall Street” penny stock operation once he had control of enough investor assets. “Then,” he told me, “its judgment day…” What he meant, of course, was that he planned to make an ungodly sum of commissions by churning his trusting clients out of quality stocks and into big commission garbage.
Sad to say, some 30 years later, this same shameless sort of activity is still going on, and investors may be in for a particularly bad stretch over the next year due to a new law intended to clean up financial advice. Many believe the law doesn’t go far enough. Worse, Camarda believes investors may be at heightened risk during the long period before it fully kicks in, and for a long time after.
Some studies show that nearly 50% of Americans believe financial advisors are required to put investors first, but this is simply not true, despite brokers’ slick marketing to make it seem so. Brokers and insurance agents are generally free to maximize their own compensation at investors’ expense, and know that they work for their companies, not their customers. The Department of Labor claims this status quo costs investors some $17,000,000,000 a year in exorbitant commissions, and has spent over six years writing a 1000+ page new rule to combat it. The brokerage industry is suing the government over it, and has successfully lobbied to weaken it, but it still in some ways represents an improvement, though a bewildering one.
Bewildering because while it mostly requires brokers – excuse me, “financial advisors” – to act in clients best interests on IRA’s starting next year, it’s business as usual on all other accounts, including joint, trust, college, and so on. Even more bewildering because brokers have to act in your best interests on IRA’s, except when they don’t, like when they get clients to sign a “BICE” (Best Interests Contract Exemption) form, which probably won’t be so hard given how little attention many investors pay to all the forms and disclosure they already get, because they trust the broker who lets them believe they put investors’ interests first, even when they really don’t.
The financial products industry – already rocked anew by the recent Wells Fargo products cross-selling scandal (and I predict this is just the tip of the iceberg, and that such practices are common at the large banks which dominate the investments business these days) – is struggling to find new ways to profit in the new order. Merrill Lynch has announced it won’t let brokers sell new IRA’s using commission products beginning in 2017, though presumably existing IRA’s will be grandfathered. Instead it will shift investors to fee products some argue are even more expensive than the commission ones they replace.
The BICE rules also apply to variable and equity index annuities – two high complaint hotspot areas – so sales pressure on these high commission products can be expected to become intense before the new rules curtail this. Ditto also for non-traded REIT’s, another high commission/high complaint arena, where investors buy products which they may never be able to get out of. Expect sales pressure to become fierce.
While the DOL initiative will hopefully begin the long process of improving the odds of investors getting a fair and honest shake from the checkered advisory industry, the new rules are too confusing and loopholed to call it a sea change. Camarda believes what’s truly needed is for all advisors to be both educated and required to put clients’ interests first in all investment matters as Camarda is, but that may be just a pipedream. What is clear is that the most abusive products will become tougher sells once DOL is effective, but until then, it’s judgment day, so hang onto your wallet with both hands. And remember, all this only applies to retirement accounts like IRA’s. For everything else, it’s judgment day as usual. And because investors may be lured into a false sense of security, thinking – and probably encouraged to think by unscrupulous salespeople – that it applies to everything, not just IRA’s, the new rule may actually make things worse, as is typical with government regulations’ unintended consequences. If you have friends who may be exposed, please have them contact us for protection ideas.