If you haven’t been following the debate on Capitol Hill over the cost of retirement investing, well, I don’t blame you. It’s a dense topic and not top of mind for most folks as summer winds down and back-to-school begins.
Yet you should be paying attention: If Wall Street prevails in its campaign to water down proposed regulations, the cost to retirement savers will be an estimated $17 billion — every year. Effectively, stock brokers want to keep in place a system that ensures their high fees while placing no requirement on them to divulge how much they charge you.
My colleague Scott Puritz, co-founder and managing director of my firm, Rebalance IRA, spent this past week in Congress patiently making the case for requiring disclosure for all retirement advisors.
The regulation, proposed by the Department of Labor, would force stock brokers to act as “fiduciaries” when speaking to clients. Translation: They have to explain their fees upfront and pledge to act in the best interest of retirement savers.
Oh sure, they’ll say they do so anyway, and that regulation isn’t necessary. Which raises a question. If they already act this way, why would accepting a rule on the matter be such a burden?
Their answer, from recent testimony, is one sure to appeal to many fair-minded people. It’s a free market. Let people choose whatever type of advisor they like. Nothing is stopping people from leaving their brokers for cheaper online innovators such as Rebalance and its competitors.
“I think the market is fair,” said Ron Kruszewski, CEO of Stifel Financial of St. Louis, Mo. “If our brokerage clients want to look at your business model, they can.”
Sure it’s fair in that sense. But keeping people in the dark about how stock brokers are paid ensures that they have as little information as possible about their own retirement. Ignorance costs real money.
Puritz explained in testimony how costly that can be. Front-end loads of 5%. Annual fees of 3%. Costs that stock brokers would vastly prefer not to have to spell out. “Our core philosophy is full and fair disclosure; we’re just not seeing that out of the brokerage community,” Puritz said.
See, stock brokers participate in a strategy known as an incremental attack on your wallet. They first claim that their fees are low. “Just 1%” is all they ask. It doesn’t sound like much.
Retirement tax
What they then fail to disclose — and under current rules are not required to disclose — is that the mutual funds they buy on your behalf cost, in the aggregate, another 1% or more. Then there are loads, commissions and other fees tacked on through the year. Pretty soon, it’s big money. Who wouldn’t want to keep that quiet?
Once people find out how much they pay for real, trust is broken. Too often, that’s only after years of such quiet abuse. They show up at our doorstep angry and upset. “Brokerage refugees” we call them.
The rules on broker disclosure haven’t been updated since 1975, in large part because the goliaths of Wall Street have fought hard to enforce the status quo and continue to charge their hidden retirement tax. The money they manage in retirement plans adds up to $14 trillion, an amazing stream of cash if you can manage to nick it for 2% a year.
A slew of campaign-style television ads is about to overwhelm the airwaves in an attempt to make the case that Washington wants to complicate your retirement.
Like with most TV attack ads, the truth is actually the polar opposite. The people paying for that expensive airtime need to keep their hidden retirement tax flowing, so they’re spending big and lobbying hard to push off regulators one more time.
Where’d they get all the money for TV ads? You get one guess.
