There's a whole slew of misleading information circulating through the legislative halls of Washington, the articles of normally objective journalists and the scintillating pixels of the social media sphere.
That this information is so one-sided makes it hard to disbelieve. That it is so pervasive makes it difficult to discredit. That it is so untrue makes it hard to understand how it's gotten past the desk of so many normally reliable editors.
Earlier this summer, it seemed assured the DOL's new fiduciary rule would include the long-neglected ERISA class of IRA investors (see "Momentum Builds to Place IRAs Under Fiduciary Umbrella," Fiduciary News, July 5, 2011). Then, with the publication of industry sponsored "research," the big finance PR machine went all out. Soon, politicians of both parties (hmm, has anyone found out how much insurance company PAC money these voices have received?) began throwing bombastic accusations at the DOL's Phyllis Borzi. Next, we started seeing op-eds and articles echoing the claims of the lobbyists, most recently in this week's Washington Times.
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With all the talk of a grass roots Tea Party movement, why isn't there a similar grass roots movement to defend the consumer rights of IRA investors? Why have the self-interests of the financial industry been allowed to define the parameters of this debate? Where are Ralph Nader and other supposed consumer advocates right now?
Truth be told, the claims that IRA investors will be harmed by the DOL's new fiduciary rule ring hallow, as I've discussed on this page earlier. More importantly, this information doesn't merely come from some theoretical musings of an editorialist, but from the real world of the business of providing investment advice. As several practitioners recently revealed ("Industry Fights Hard to Exclude IRAs from Fiduciary Standard," Fiduciary News, September 7, 2011), the claims that 7 million IRA investors will go without investment advice under the new fiduciary rule are false. Those IRA investors are already getting advice through firms currently subject to the proposed fiduciary rule.
More importantly, a case can be made that IRA investors are better off receiving investment advice under the protection of the fiduciary rule. The fiduciary rule would, at the very least, require current conflicts-of-interest to be exposed and, in the best case, eliminate those conflicts of interest. Indeed, an academic study from last year ("Broker Incentives and Mutual Fund Market Segmentation," by Diane Del Guercio, Jonathan Reuter, Paula A. Tkac, The National Bureau of Economic Research, August 2010) shows no-load mutual funds outperform broker-sold funds by 1%. The authors conclude the former funds use their resources to improve investment management while the latter funds use their resources to improve distribution.
One of the fundamental concepts in Trust Law, from which the duties of a fiduciary derive, states a beneficiary's assets must be used for the sole benefit of the beneficiary. In the case of mutual fund, the NEBR research calls into question whether using the fund's resources to improve distribution really accrues to the benefit of the shareholder (the beneficiary).
The industry claims requiring brokers to operate under the fiduciary rule will "harm" IRA investors by preventing them from obtaining investment advice. The truth is IRA investors already receive investment advice from advisers subject to the fiduciary rule. A better claim might say not requiring brokers who offer investment advice to not operate under the same fiduciary rule as registered investment advisers will harm IRA investors.
What lobbyist will stand up for IRA investors and make this bold statement?
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
