Written by Sahil Arora and Gabrielle Inzirillo, Ventures Associates for Plug and Play Fintech.
The Trump presidency‘s first 100 days have been contentious to say the least, with numerous policies being re-thrust under the limelight for debate.
One such piece of legislation undergoing renewed scrutiny is the DOL’s Fiduciary Rule.
In 2016, the Labor Department issued a ruling that broadens the scope of financial advisors’ responsibility in the retirement industry to always act in the best interests of their clients. Up to date, only registered investment advisors have had to comply with the fiduciary standard. Other advisors, such as stockbrokers and investment insurance salespeople have only needed to uphold the suitability standard.
A far laxer alternative, the suitability standard only requires that the advice given be “suitable” based on their client’s personal situation but not necessarily in their best interests. A fine line, but one that can have heavy repercussions for clients. On April 10th 2017, the fiduciary standard was meant to be applied to the entire retirement industry in a move to support the aging population as they roll over their 401(k)s into IRAs but was pushed back to June 9th, few believe the ruling will ever see the light of day.
When your advisor is investing in himself over you.
Financial sales representatives do have a few rules they need to abide by.
For one, they must be aware of their clients’ financial situation and the appropriate products they recommend need to be suitable. However, suitability is a far cry from best fit. A representative can legally choose to recommend financial products that maximize their own profit over other products. For example, variable annuities paired with steep commissions can be defined within the “suitable” standard.
These representatives do not have to disclose:
· Alternative products that they carry with lower fees
· Negative information associated to the product such as independent agency ratings
· That the exact same product can be obtained from a competitor for cheaper
Registered Investment Advisors on the other hand, are bound by numerous additional clauses. As well as being fully aware of their clients’ financial situation they must always put their client’s interests first, and cannot purposefully omit to disclose hidden fees or conflicts of interests. When conflicts do arise, they need to be managed in such a way as the client benefits foremost.
Following the tide of banking scandals uncovered in recent years, the question of suitability versus fiduciary is increasingly crucial. When Wells Fargo employees started opening unauthorized deposit, savings and credit card accounts for customers, it was suggested that the elderly were overly targeted. Yet other age groups should not feel exempt from this debate as fiduciary responsibility can impact all clients of the financial industry regardless of age and wealth.
When the rich and famous fail to catch the difference.
Earlier this year, Johnny Depp, the astound actor best known for taking on “larger-than-life” roles such as Jack Sparrow in the Pirates of the Caribbean series, and Sweeney Todd, filed a lawsuit against his former financial advisory firm, The Management Group.
The big question at hand is: who should have been responsible for Depp’s personal finances?
Having accumulated over $650MM over his professional career, Depp had supposedly become accustomed to a billionaire’s lifestyle spending over $2MM per month on multiple homes, barrels of wine, and exquisite accessories. Over the course of a 16-year relationship with The Management Group, Depp relied on his advisors but never took the time to understand his personal finances. Not once in 16 years did the firm file Depp’s taxes on time, and not once did Depp see concern for replacing his advisors, or worse, he didn’t concern himself at all with his finances.
The Management Group filed a counter-suit against Depp denying any wrongdoing and stated that they did their best to prevent Depp from irresponsible spending. The firm earned over $28MM from Depp over their relationship. Had Obama’s fiduciary law passed, it’s likely that the firm would have been obligated to prevent Depp’s irrational spending or at the least, terminated their relationship with Depp.
It quickly becomes evident that both parties made mistakes. Depp’s lack of concern for his finances is inexcusable. On the flip-side, The Management Group profited greatly from the relationship and the lack of fiduciary responsibility allowed them to ride the waves without enacting any changes.
Through Johnny Depp’s unfortunate experience, Americans can realize the importance of understanding their personal finances and the limitations of getting advice.
No hand-holding for Americans just yet.
The road to financial freedom made not be the smoothest, and when it comes to specialized advice, we all need a little help. Economists at the Economic Policy Institute estimate that the 60-day delay in the enforcement of the Fiduciary Law will cost Americans a whopping $3.7 billion dollars. This is a clear indication that retirees are being heavily penalized for their ignorance, willful or not.
Fortunately, regardless of what President Trump concludes, those Americans looking to take control of their finances have more options than ever. In our increasingly digital world, there are hundreds of FinTech solutions to help Americans manage their finances.
PFMs, personal finance management applications are designed to help users manage their money. They come in many forms targeted at different audiences, each with their own quirks, whether it’s design, a unique saving feature, a charitable component, or creative pricing. Some of the most popular PFM solutions include Mint, Digit, Level Money, and Dobot. PFMs are a great tool for understanding your financial behaviors but require an initial investment of time and knowledge to maximize the benefits.
Robo-advisors are automated investment solutions that create a customized investment portfolio based on your risk profile. By simply answering a few questions related to your financial goals and risk tolerance, these apps devise an investment portfolio designed to achieve your objectives. Betterment, Wealthfront, Instrument Capital, and Acorns each offer unique approaches to helping you reach your financial goals.
In addition to PFMs and robo-advisors, Americans can invest their assets through peer-to-peer (P2P) platforms such as LendingClub, OnDeck, Funding Circle, and Prosper among others. P2P lending platforms offer a means of diversifying traditional financial instruments such as bonds and equities. In many cases, they offer attractive returns but require investors to take a proactive stance in managing their wealth.
So whether we do ever see the Fiduciary Law come to be, know that there are always options. And you don’t have to be retired to take the first steps!
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