The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Death of A Good Idea

09/18/2018

Obama was right.  Trump is wrong.

Stockbrokers are very different from registered investment advisors (RIAs).  Stockbrokers can charge all sorts of hidden fees and follow the “suitability” standard, which allows them to put mutual funds into a client’s portfolio that pay kickbacks to the stockbroker.  They even increase the price of bonds and make the client pay the increased price.  RIAs do not follow these shady practices, because we are subject to the “fiduciary standard,” which means we must disclose ALL our fees and invest their funds in the best interests of their clients.

In 2015, Obama’s Council of Economic Advisors determined that unnecessary and hidden fees cost Americans $17 billion annually in their retirement accounts alone.  The Department of Labor then proposed that the fiduciary standard should be applied to any advisor of retirement accounts.  The brokerage industry lost their collective mind!  A new study by professors at the University of Wisconsin and California State looked at 36 publicly traded brokerage firms, mutual fund, and insurance companies and concluded their combined value dropped $14 billion.  This, they called the “Obama Effect.”

Suffering a one-time loss of $14 billion to save Americans $17 billion a year seemed like a good deal to me.  Then, along came Trump, who gutted the fiduciary standard, and the value of those same 36 firms rose $56 billion.  This, they called the “Trump Effect.”

R.I.P. Fiduciary Standard

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