Tahoe Market Pulse: Winners from the new fiduciary rule
Last week the Department of Labor said that all brokers and wealth managers will soon be held to a “fiduciary” standard, the same standard as Registered Investment Advisers (RIAs) regarding retirement accounts.
The fiduciary standard simply means that advisers are obligated to act in the best interest of their clients.
That sounds small, but this will mark a big change to the industry. As with any big change there are winners and losers. Here are the winners:
Index Funds. When I first entered the financial industry in the 1980s mutual funds were the dominant investment vehicle. Fidelity’s Magellan fund was by far the largest and they touted a good track record.
Times have changed and most of today’s younger investors haven’t even heard of the Magellan fund. What happened? Simple. Most active managers underperformed the market. Great past performance failed to lead to good future results.
Mutual fund families like Vanguard, which mostly offered index funds with very low fees, performed better. Their S&P 500 index fund became the largest mutual fund while assets in Magellan and most other active management funds decreased. Index funds, with their low fees and without a sales charge, are winners from the new regulation.
Since index funds are winners, it goes without saying that exchange-traded funds (ETFs) are also winners, since almost all ETFs are linked to indexes.
ETFs allow investors to gain exposure to almost every asset class for a low fee. The asset-weighted average fee of the $2.1 trillion invested in ETFs is only 0.27 percent. Plus, they are tax efficient.
Unlike mutual funds, most ETFs don’t distribute capital gains to shareholders and the end of every year. Since advisers will need to act on the best interest of their client, low cost ETFs will become even more popular.
Another winner is you, as an investor. Assuming you don’t sign an “exemption” contract that removes the broker from the standard, your adviser will have to act in your best interest.
The adviser can’t fill your portfolio with securities that pay him the most. Individual stocks and ETFs will replace mutual funds with loads or 12b-1 fees. For small investors, discounts brokerage firms offer solutions. In my book, these are good changes.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.