by Frank Muller
The Department of Labor issued rules governing the standards for providing financial advice to holders of ERISA accounts. There are nearly 1,300 pages of new rules and guidelines to digest, but the quick takeaway is that the standards and liabilities associated with providing financial advice to qualified accounts have increased—markedly. Further, we are investors need to understand the potential consequences to us as the practice of wealth management may be reduced to the cheapest and easiest to perform.
One major implication is cost. Can we safely assume that cheaper is better? That is the message these rules appear to suggest about financial advice. Add to this regulatory concoction the ingredients of commoditized advice and cheap, passive investing made possible by technology and financial engineering. The result is mounting cost pressures for financial advisors and a reduction of options for investors. Go online and try out any of the online inexpensive tools and one may have a chuckle finding out that after answering three or more questions, a computer spits out a few options and I am done – really?
May I just point out the contradictory notion that compliant advice under DOL guidelines—especially in the instance of many low-cost providers—practically ensures that the extent of knowing an investor would be limited to a handful of questions about age, income and risk tolerance? Is that what the new standards are really about … shortcuts? If so, we need not worry about them. But my suspicion is that the standard is meant to be higher than that—and it should be.
Since regulatory pressures and technological advancements are not likely to let up anytime soon, wealth management firms are left with the question of how to provide quality advice to clients at a fair price and investors are left with the question as to whether the online questionnaire advice they receive is actually good for them and even if they receive wealth management advice is the advice as robust and comprehensive as it needs to be?
And what is that price economically directly and from an opportunity cost perspective? Investing is one thing, planning and well ordering a complete financial life is a far different, and decidedly more important thing.
The answer may lie in the same process that almost every other product or service is valued and priced. If I buy a new car, do I want a sunroof, all-wheel drive or any of hundreds of other options? Some of those options may increase the level of safety like anti-lock brakes while others are elective and relate to driver comfort. The government sets the minimum standards for vehicles, but consumers are free to choose the level of comfort, performance or safety they desire. And they pay more or less depending on the value they ascribe to these options.
When presented with a short questionnaire and the output is just three different options (conservative, moderate, aggressive) – does it not strike one that we are being offered three different versions of the Model T (black, white, gray)?
Just as providers of advice may incur more costs and liabilities, investors should understand that the cost of choosing price alone as the benchmark for a fiduciary, then that black Model T may have profound long-term costs as well. Imagine no seat belts, no anti-lock brakes, no air-conditioning or heater, no windshield wipers and on and on…. This may be the unintentional consequences of focusing wealth management to “investment management” and quality defined only as “cheapest”.
In how many ways do well intentioned regulators and legislators prescribe rules that actually come over the long run to sometimes do more damage than the harm they were trying to correct. It is true in my mind that purveyors of advice (medical, legal, architectural, electrical, financial …) should be held accountable for failure to meet standards of professional conduct.
Further, it is my view that purveyors of advice should not be allowed to sign away most of their liability in small print terms and disclosures that are difficult for even trained lawyers to parse. We must try to always align both incentives and consequences to the actions of fiduciaries and we must educate ourselves in education systems starting from kindergarten on how to well order a financial life.
It has always been shocking to me that we educate our high school students in Algebra and Calculus but will not give them education in budgeting, insurance, banking, investing…. It would seem to me that every year should include a required course in life management that includes all these topics and more to help prepare our children to actually know how to order their lives financially.
If this onslaught of regulation and technology continues, we might also consider framing with our clients or ourselves as investors the nature and extent of the relationship that is desired. Investing in the cheapest and simplest way may seem attractive at first but when we know that long term wealth outcomes come primarily from comprehensive planning including wills, trusts, taxes, risk management, insurance requirements such as life, health, disability, long term care, qualified accounts, social security, Medicare and Medicaid and on and on…. Reducing planning to just nominal investments focusing only on price as the fiduciary standard strikes me as regulation fraught with long term unintended consequences.
We are also creating an industry that now advertises that cheaper is better and all you need is a phone and three questions, and you are good. Hmmm….
In the end, it is simply a fallacy to assume that cheap and easy will always equate to quality. One thing I have learned is there is no free lunch, and nothing done well is done easily and cheaply.