This blog post was written in response to the episode “Retirement and the Financial Services industry” which aired on June 12, 2016 on the HBO show Last Week Tonight with John Oliver:
It does not come as a surprise that the financial services industry is one of the least trusted industries in this country and often rightfully so. For decades Wall Street has churned portfolios and put their own needs in front of their clients, held only to a broad suitability standard. If you were not aware of this you can catch yourself up by re-watching one of Bernie Sanders’s previous speeches. Recently this issue was brought up to a more broad audience on Last Week Tonight with John Oliver. The show airs on Sunday nights on HBO highlighting the previous week’s news stories while using humor to reach everyday Americans who may not be aware of how these issues may affect them.
The episode that aired on Sunday June 12th might cause advisors around this country a lot of grief and bring on complicated questions from their clients. In the episode John discussed the meaning of the word fiduciary and what that could potentially mean if you are currently working with a financial advisor or are enrolled in a 401(k) plan. What is a fiduciary you ask? In layman’s terms it’s an advisor that is legally required to act in your best interest. Now you would think anyone handling someone else’s money would have to act in this manner but that’s far from the case, only 5% of advisors are currently working as 3(38) fiduciaries!
Hold on don’t run and have a panic attack checking your previous statement just yet. If you are unaware if your advisor is acting as fiduciary then you are most likely falling into the suitability model. What that means is your advisor can pass along recommendations for investments which pay him or her a higher commission or fee than alternatives available to you without disclosing that he or she will be receiving commissions or kickbacks (12b-1 fees). As you can imagine that can provide quite the conflict of interest.
Now the average American might not be working with an advisor but most are enrolled in some sort of retirement plan that is provided by their current or previous employer. In the show Oliver discusses the process his production company went through to start a 401(k) for their employees and there were a few main takeaways.
First, the process can be long and complicated so why not work with a professional that specializes in the process and management of retirement plans.
Second, MAKE SURE THAT PERSON IS A FIDUCIARY! If your company already has an advisor and they are not a fiduciary, get a new one.
Third, beware of fees. Aside from the administration, record keeping, and advisory fees, which should all be benchmarked across the industry, participants and plan sponsors may be unaware of the fees they’re being charged on the fund side. High fees are no indication of high returns, actually quite the opposite.
Finally the last point I want to touch on is active vs. passive management. This is where I do not 100% agree with Mr. Oliver. He recommends that instead of paying the high fees for actively managed accounts participants would be better off choosing to invest in an index fund that tracks the stock market without the cost of high fees. In a perfect world that makes complete sense but what about a world like the one we live in today? Where equity valuations are at all-time highs, P/E valuations have overstretched their boundaries, a turning credit cycle and the vast geopolitical events unfolding that could shock the global economy. I would imagine I would want some diversification instead of just tracking the S&P 500.
In closing I truly enjoyed Oliver’s piece; no doubt it will cause ripple effects in the financial services industry but it struck close to home for both myself and the rest of the individuals I have the pleasure of working with everyday. This was the reason why we left one of the big banks and started up Twelve Points. We believed in putting our clients’ needs first and taking on 3(38) fiduciary responsibility. We have always talked about how we are bringing trust back to an industry that has completely lost America’s trust but maybe it’s time for Americans to open their eyes and start making smarter choices. Like Mr. Oliver learned, this can get away from you pretty quickly.