Many may think that the DOL fiduciary rule is a done deal. We disagree. There are a number of activities and opportunities underway to stop the irreparable harm this rule will do to consumers.
Yes, President Obama has vetoed the House Joint Resolution requiring Congressional intervention, but Speaker Ryan has two arrows left in his quiver. As a part of his #betterway initiative he has outlined many action steps to stop “economically significant” rules from moving forward without congressional approval. The DOL rule has been deemed by the OMB as economically significant.
In addition, the appropriations process this fall may also place limits on the DOL’s ability to implement the rule. And let’s not forget, as we reported last week, five lawsuits have been filed and the outcome is yet to be determined. Therefore, we will continue to inform and educate about the harmful impact of this rule. So let’s start with the DOL’s House of Cards.
The oft-quoted, but disproven “loss of $17 billion” is repeated by every supporter of the DOL fiduciary rule and often parroted by journalists who must fill the unfillable vacuum of daily news. The number has been repeated so often by so many that most do not even question it anymore.
Hearing it over and over reminds us of Jonathan Swift, the author of Gulliver’s Travels, when he warns us about how lies become fact in his essay titled “The Art of Political Lying,” here is an excerpt:
“Falsehood flies, and truth comes limping after it, so that when men come to be undeceived, it is too late; the jest is over, and the tale hath had its effect: like a man, who hath thought of a good repartee when the discourse is changed, or the company parted…”
We’re not saying anyone intentionally or even unknowingly told a falsehood. But, the parallel is apt. The Regulatory Impact Analysis is really a house of cards based on cherry-picked studies, misreading relevant economic literature, and ignoring value added benefits and services associated with higher fees.
The willingness of our leaders to accept faulty research and analysis because of an inherent bias against commissions and variable compensation is disheartening. What is devastating is forcing a rule on consumers that will drastically and negatively change the way they access and pay for advice.
If we don’t really understand - through irrefutable and reliable research - how to help America save and protect them from decisions (by an advisor or themselves) that will negatively impact their retirement plan, how can we expect improvement?
There are many reasons Americans aren’t saving enough or are experiencing losses. Here are just a few…
Studying Investor Decisions
The DALBAR 2016 Quantitative Analysis of Investor Behavior (QAIB) has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds over both short and long-term time frames.
According to the DALBAR summary “the results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.” The difference in performance – called the gap in performance - suggests that the average investors’ behavior and poor market timing cost them money.
Some respected financial experts have pointed out problems with the QAIB findings and there may be some. However, Morningstar reported similar findings in an annual study. Morningstar calls their study “Minding the Gap,” which underscores the risks of trying to time the market.
The study found that investors cost themselves between 74 basis points and 1.32 percent per year by mistiming the market. The average annualized investor-returns gap for the 10-year periods ended 2012 through 2015 was negative 1.13 percent. So, there might be something to this.
Morningstar and DALBAR use quantitative analysis of the results of poor market timing. Other studies seek to discover why. Two studies in particular find that investment losses and poor market timing are often the result of our own behavioral deficiencies.
Respected professor Wade Pfau recently reported on a Vanguard study suggesting that “behavioral coaching” had the biggest impact on real-world investor returns. He shared Vanguard’s analysis that being able to overcome your own behavioral quirks could add more than 1.5 percent to your returns, as opposed to falling victim to your own human tendencies.
And those tendencies can be pretty ingrained. So much so that the retirement researcher has a fact sheet on common biases that have a negative effect on investment experience.
Decreasing Financial Literacy
Then there’s that pesky problem - growing older. On a recent Retirement Researcher blog, they cited a research article by Michael Finke, John Howe, and Sandra Huston called “Old Age and the Decline in Financial Literacy.” The authors provided a financial literacy test to older populations and found that financial literacy tends to decline by about 1 percent per year after age sixty, but financial confidence remains the same.
Other research from David Laibson at Harvard University has also revealed numeracy (the ability to understand and work with numbers) reduced with age. As we grow older, it becomes harder to perform basic arithmetic calculations and understand the nature of risk.
Retirement savers and advisors need to understand how declining cognitive skills that occur with aging make it more challenging to manage significant investment decisions like diversification, market timing, income planning and withdrawals. This is more severe if the family member who dies was the individual who managed the household’s finances and the surviving members are aging as well.
All of these challenges – human behavior, bias and illiteracy – emphasize the need for MORE trusted and qualified professional advisors to help guide Americans through the maze of retirement planning, not LESS.
America faces many challenges saving for retirement and basing a rule that will harmfully change the marketplace and consumers’ ability to save on a precariously balanced house of cards is wrong. Americans aren’t losing $17 million a year because advisors are taking too much in fees. There are many known and unknown reasons Americans aren’t or can’t saving enough and we should work to understand them all before we try to regulate.
Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.
Contact Kim at [email protected]
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