1. Business

Fiduciary rule presses Wall Street to raise bar on retirement advice, so why not for all advice?

When asked, On a scale of 1 to 5, how significant is this new Labor Department rule?, Certified Financial Planner Ray Ferrara said: "It's a 6," without hesitation. He was one for the first witnesses to testify before the Department of Labor last August. Photo Courtesy Pro-Vise/Pro-Vise President and CEO Ray Ferrara, CFP.
Published Apr. 15, 2016

I've watched Wall Street firms for years vigorously fight rules that would require investment advisers and brokers to put customer interests ahead of their own wallets. It's proved a long, cynical and, at times, demoralizing experience.

Come on, people. Would you balk if doctors choose to give only "good enough" treatment rather than what best suits the patient?

It should be no different with money advisers.

As America is finding out the hard way, saving money — especially for retirement, when there's rarely enough time left to make up for mediocre investment advice — is tough enough under the best circumstances.

This month, the U.S. Department of Labor issued rules that require financial advisers of retirement accounts (including individual retirement accounts and health savings accounts) to act in their clients' best interest.

Labor Department Secretary Tom Perez reminds us that the new rule is an attempt to catch up with today's very different economic scene. "The retirement landscape has changed dramatically over the last 40 years," he told Bloomberg News.

"In an Ozzie and Harriet world, people had a defined benefit plan, worked for the same company for 30 years and retired with a pen, a pension and a party. They did not have to worry about their pensions running dry" — a reminder that old-styled pensions were once guaranteed to pay retirees for as long as they lived.

Today, in the $13 trillion world of 401(k)s and IRAs, Perez said, consumers must take ownership of how to spend their hard-earned money.

I know. It defies common sense that a new rule that puts investor interests first is even grist for a business column. It should have been in place from day one.

But many advisers of big investment firms operate by rules that require them only to offer investment advice that is merely "suitable" to clients. That means it is okay to recommend, for example, one mutual fund over a similarly focused one, even if the first one rewards the adviser/broker with a bigger commission or even has a history of weaker returns than an alternative fund.

That "good enough" but not great advice has cost consumers an estimated $17 billion in retirement dollars, according to the White House.

The new Department of Labor rule, once it takes effect by April 2017, will raise the bar on how advisers must offer advice on retirement money.

It has no effect on how advisers handle regular investment accounts. Suitable advice will still trump what's best for those clients.

But maybe we're witnessing the start of a long-overdue overhaul of how money advisers and brokers counsel customers.

In Clearwater, Ray Ferrara has been in the investment advisory business for more than four decades. He's one of several thousand certified financial planners, or CFPs, who already are required by that earned title to put client interests first when offering any type of investment advice. Ferrara is also CEO of ProVise Management Group, which manages more than $1.2 billion of customer money.

Given his long history in the money advice business, I asked him: On a scale of 1 to 5, how significant is this new Labor Department rule?

"It's a 6," Ferrara says without hesitation. He was one for the first witnesses to testify before the Department of Labor last August.

Every investor with any amount of money in the markets, he says, should start asking their adviser questions like these:

• Are you serving me with a fiduciary standard and putting my interest ahead of your own?

• What other (investment) products did you look at?

• How much compensation do you receive recommending this fund versus others?

"I think this is the beginning of a groundswell," Ferrara says, one that will create a single, higher standard for all investment advisers counseling clients on any money matter.

Next up? The Securities and Exchange Commission. The SEC has dabbled for years with a plan to impose a fiduciary standard over a "suitability" standard of advice to Wall Street firms. But it has been bullied by the country's most powerful industry — the one it is supposed to regulate.

Ferrara believes fresh attention paid to this topic will create some momentum for change.

"Got to start somewhere," he says.

One of the big opponents of the government push to impose a fiduciary standard on retirement accounts was Paul Reilly, CEO of St. Petersburg's Raymond James Financial investment firm. A year ago, Reilly was actively fighting the proposed rule at the time with the help of securities industry lobbyists.

Before the new rule was approved, the industry had won some changes. But the core of the rule remains.

Asked for comment now that the rule is going to take effect, Raymond James released a statement, saying in part that it had "worked tirelessly" to gain improvements to the Labor Department rule.

"We are examining the final rule closely with objectives to preserve client and adviser choice to the best of our ability; keep costs down for clients; support advisers in serving any client they choose to work with; and protect advisers by providing resources to help them efficiently comply with the rules," the firm said.

Labor Secretary Perez argues the new rule is not some response to financial advisers bent on doing the wrong thing for their clients (though those bad eggs are still out there). Rather, the rule is trying to fix a poorly conceived compensation system on Wall Street.

"This is about a structurally flawed system in which a consumer's best interest is not aligned with the incentives that result in payments to brokers," he said. "We now have aligned those incentive structures."

Maybe. Never give Wall Street a full year to adopt a new rule like this one without some likely mischief along the way. There's already talk of potential lawsuits brewing by high-powered Washington attorneys for the securities industry aimed at stopping the fiduciary rule. At the top of the likely attorney list: Eugene Scalia of the Gibson Dunn law firm, who happens to be the son of recently deceased Supreme Court Justice Antonin Scalia.

The real question is: If the new fiduciary rule works for retirement accounts, when will that standard of advice spread to all investment accounts?

Contact Robert Trigaux at Follow @venturetampabay.


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