A Wall Street Journal editorial published in the wake of yesterday’s great fiduciary unveiling is attracting a lot of attention, accusing the government of intentionally inflating private sector costs to boost state retirement plan participation.
David Lyon, CEO of digital advice provider Oranj, agrees with the outcome, if not the nefarious intentions.
“The government recognizes there is retirement crisis and savings fall far short of what is needed, but investing in treasuries at 1.8 percent though myRA doesn’t help,” says the co-founder of the Chicago-based fintech firm. “We’re told that unsuitable products cost investors $17 billion, but that’s a very hard number to quantify in a silo. It’s a number I think they used to justify moving forward with the fiduciary rule.”
Lyon points to the order-taking provision as an example of the surprises contained in the final fiduciary rule, one he says undermines the DOL’s original intent.
“The order-taking provision, as I see it, means someone could call their advisor to invest in an IPO, or 500,000 shares of Alibaba Group for instance, and the advisor can place the trade and not be held to a fiduciary standard,” he explains. “[It] seems to be in direct conflict with how an individual investor would define the term fiduciary. As with all well-intentioned actions from the government—and I do think this is well-intentioned—perception is one thing, but the actual law is something else.”
Lyons references a number of studies, Vanguard’s in particular, the he claims prove that investors who work with advisors are far better off than those that don’t.
“Advisors add about 3 percent a year in alpha. At 1.2 percent inflation currently, investing in treasuries at 1.8 percent is a problem. And, yes, the rate of return is guaranteed, but that’s essentially a variable annuity. So why isn’t the government held to a fiduciary standard?”
As for the rule’s real-world impact, “time will tell,” but he says the rule will have to most likely be “dramatically revised eventually.” He also believes it will have a “snowball effect” with other issues and agencies outside the DOLs purview.
“It’s actually something we’re already seeing with FINRA questioning the ability of robo-advisors to act as fiduciaries,” Lyon notes.
He concludes by noting that no matter how well-intentioned the government action, it will not be able to change three things, although it will try:
- People will make bad decisions with their money. “Leasing a car they can’t afford will have a bigger monetary impact over, say, a 20-year period than owning a fixed indexed annuity, for instance. “
- Financial literacy continues to be an issue. “Advisors are coaches and trainers to help in this area, and already the government is limiting the choices of tools they can use. Paying more for a variable annuity and being able to sleep at night is a suitable investment, but the public has to be educated on this.”
- As mentioned, advisors add alpha to people’s lives. “The rule adds to the perception that advisors are out to take your money. Advisors enter this business because they are passionate about helping people, not how much commission they’ll make.”