Tahoe-Truckee Market Beat: The Conflicted Advice Rule
December 6, 2016
The post-election stock market rally is continuing unabated as I write this. The Dow Jones Industrial Average is trading at record levels today. Part of the reason for the rally is the anticipation of new policies that will stimulate business and the economy. Following the election, US stocks have rallied, the dollar has strengthened and bonds have sold off, leading to an increase in interest rates.
One policy that I don't expect to change under the new administration is the "conflicted advice" rule, which will take effect in April of 2017. Under current law, advisers who give advice on retirement plans like 401ks and IRAs are subject to what's known as the "suitability standard," which means that they only have to recommend investments that are suitable for a client's needs.
When the new law takes effect, advisers on retirement plans will be subject to the "fiduciary standard," which means that the adviser must place the client's interests first. Typically advisers who operate under the fiduciary standard charge a flat fee for their services, and advisers who work under the suitability standard charge commissions.
The White House Council of Economic Advisors, CEA, has an excellent study posted on the White House's website, whitehouse.gov, that explains in great detail the extra costs that individuals pay when receiving conflicted advice.
They have estimated that about $1.7 trillion of Individual Retirement Account assets are invested in products that generate conflicts of interest, and the cost to investors is approximately $17 billion per year.
The CEA has also concluded that conflicted advice leads to lower investment returns due to the higher costs associated with commission based products. Their estimate is that conflicted advice results in returns that are about 1% lower per year.
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A measly 1 percent may not sound like much, but over a long time frame, one percent can make a substantial difference in your retirement nest egg. For example, a 35-year-old who saves $5,000 per year for thirty years, until age 65, will have about $456 thousand if they earn 5%.
Just by adding 1% to that return, by bumping the rate of return up to 6%, the nest egg will grow to $533,000 with all other factors being equal. That's a difference of $77 thousand dollars in thirty years, which is a sizable amount.
The new law will help retirement savers considerably.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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