Your new financial adviser has a well-decorated office, a firm handshake, and a bright smile. After an hourlong meeting, you leave with what you think is a state-of-the-art investment portfolio. You feel financially secure, taken care of.
It’s also possible you’ve made a huge mistake. The White House under President Barack Obama estimated that Americans lose $17 billion a year to conflicts of interest among financial advisers. Wall Street lobbying groups dispute that math—and they’re right to do so. The actual dollar amount is probably much higher.
The Fiduciary Rule, finalized under Obama and originally set to take effect earlier this year, seeks to cure this disconnect. All advisers were to be required to put clients first when handling retirement accounts, where the bulk of everyday Americans’ savings reside. But then Donald Trump won the election, and on his 15th day in office, the Republican president ordered the Department of Labor to reconsider the rule. His advisers echoed Wall Street arguments that tying the hands of advisers would limit investor choices, raise the cost of financial advice, and trigger a wave of litigation.
This Friday, the rule will take partial effect. Its future, though, remains deep in doubt. Many Republicans in Congress oppose it, and Labor Secretary Alexander Acosta has suggested that at the very least it be revised. Then last week, Trump’s newly appointed chairman of the Securities and Exchange Commission, Wall Street lawyer Jay Clayton, announced his agency would also seek comment on the topic, a process that could further threaten the rule’s survival.
While Washington wrestles with the fate of the Fiduciary Rule, the financial advice landscape remains supremely dangerous. Three professors recently analyzed a decade of disciplinary data on 1.2 million financial advisers. What they found is decidedly unpleasant:
- At the average firm, 8 percent of advisers have a record of serious misconduct.
- Nearly half of those 8 percent held on to their jobs after being caught. About half of the rest got jobs at other financial firms. In other words, a year after serious misconduct, about three-quarters of advisers found to have wronged clients are still working.
- It gets worse: Some 38 percent of those misbehaving advisers later go on to hurt even more clients.
- You might think bigger firms would be more diligent, but you’d be wrong. At some large firms, more than 15 percent of advisers have records of serious misconduct. The highest was Oppenheimer & Co., where 20 percent had such black marks. Oppenheimer responded to the study, first published a year ago, by saying it replaced managers and made changes to hiring, technology, and compliance procedures.
- Predators typically seek out the weak, and financial advisers are no different: The study shows that those with misconduct records are concentrated in counties with fewer college graduates and more retirees.
Offering financial advice is enormously profitable, with U.S. investment firms achieving operating profit margins as high as 39 percent, according to the CFA Institute. And once advisers collect enough client assets, they can get huge bonuses for switching firms (and bringing their customers with them). Until recently, the going rate was a bonus of more than three times the annual fees and commissions the adviser brings in the door; an adviser with $200 million under management could expect a bonus of $6.6 million. (The threat of the Fiduciary Rule, however, caused bonus offers to plunge.)
Meanwhile, the total cost of bad advice to consumers—in higher fees and lower performance—is probably much higher than the $17 billion estimated by Obama’s Council of Economic Advisers. The CEA figured investors are losing an extra 1 percent annually on $1.7 trillion in individual retirement accounts controlled by conflicted advisers. But IRAs represent just an eighth of the $56 trillion in financial wealth Americans control, according to Boston Consulting Group.
