Yesterday, the New York Times ran a column that claimed to illustrate the issues at the heart of the current debate over the so-called “fiduciary duty rule,” which is slated to affect retirement accounts in the coming months. Except the column completely avoided one of the most important issues—access to financial advice—and instead ruminated on the troubles afflicting movie star Johnny Depp. Mr. Depp may be profligate and his money managers may have been asleep at the wheel, but the fiduciary duty rule has nothing to do with the ultra rich or their expensive advisors. Quite the opposite. Its impact will be felt almost exclusively by moderate income Americans precisely because they have only moderate incomes.
The rule was proposed and implemented in 2015 and 2016; if left unchanged, it will become effective in April 2017. Its stated intent is to ensure that investors receive quality financial advice by requiring that brokers selling certain retirement savings products conform to a “fiduciary duty” standard. In legal terms, acting as a fiduciary means handling another person’s business with the care that a prudent person would take in handling his or her own affairs. Specifically, the rule is intended to address situations in which brokers act as advisors, providing information to investors about the pros and cons of different types of retirement accounts.
This sounds good. Why wouldn’t we want advisors to act in investors’ best interests? Isn’t that just good business? It may be, but there is a difference between deciding to act in your clients’ best interests and abiding by a regulation that imposes a legal standard. The first is essentially costless and may actually benefit the broker by promoting a reputation for customer service. The second is anything but costless. Aside from the expense of implementing necessary compliance procedures to ensure that everything adheres to the law, imposing a legal duty raises the specter of litigation. Litigation, even baseless litigation, is always extremely costly.
Which gets us to the real issue. The problem is not that brokers might have to incur additional expense. The problem is that they might decide the extra expense is just not worth it. And here’s why Mr. Depp and his problems are a terrible lead-in to the debate. I would bet a considerable amount of money that Mr. Depp’s advisors are not brokers being paid on commission. I would bet that instead they are advisers paid a fee based on a percentage of the assets they manage, and that they already abide by a fiduciary duty standard. They are willing to do that because they make huge amounts of money managing rich people’s assets.
Typical rates for this type of service are about 1 percent of assets under management. The New York Times article estimates that Mr. Depp has earned about $650 million throughout his career. If his advisers were managing even just half that amount, that would mean he was paying them $3.25 million a year to manage his money. By comparison, the average U.S. retirement account holds only $5,000. The work involved in managing $325 million is more than the work involved in managing $5,000, but not much more. Certainly not 65,000 times as much work. Considering that an account with $325 million would pay $3.25 million and an account with $5,000 would pay just $50 per year, based on a 1 percent fee, which account would you take if you were an adviser?
The risk the new rule presents is that average investors will lose the access they currently have to financial advice from real people. (There are some computer algorithms that can devise investment strategies and these services will likely pick up much of the slack, but there are still things only a human being can do—have a phone conversation and answer questions, for one.)
It’s not that the column was entirely wrong-headed. It did highlight one of the central questions of the debate, which is whether average people are smart enough to deduce that advice from someone paid on commission must be taken with the appropriate level of salt. But by focusing on someone who will be unaffected by the rule, whose wealth insulates him almost entirely from such “protective” measures, it obfuscates the real problem. The problem is that regulation aimed at “helping” or “protecting” investors usually just protects them right out of the market. Which is to say that it’s no protection at all.