Jack Bogle: Putting Clients Second

[Ad Orientem]

THE Trump administration recently announced that it intends to review, and presumably overturn, the Obama-era fiduciary duty rule that is scheduled to take effect in April. The administration’s case was articulated by Gary Cohn, the new director of the National Economic Council.

Mr. Cohn, most recently the president of Goldman Sachs, called it “a bad rule” and likened it to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Comparing healthy and unhealthy food to healthy and unhealthy investments is an interesting analogy.

The now-endangered fiduciary rule is based on a simple — and seemingly unarguable — principle: that in giving advice to clients with retirement funds, stockbrokers, registered investment advisers and insurance agents must act in the best interests of their clients. Honestly, it seems counterproductive to go to war against such a fundamental principle. It simply doesn’t seem like a good business practice for Wall Street to tell its client-investors, “We put your interests second, after our firm’s, but it’s close.”

Read the rest here...
https://www.nytimes.com/2017/02/09/opin ... .html?_r=0

[thisisallen]

Didn't read the article but regarding the topic of the rule this is another perspective:

MarketMinder's View:
"Remember all the handwringing late last week about President Trump’s move to delay the April rollout of the Department of Labor’s fiduciary rule? Looks like everyone should hold their horses for a bit. The president’s final memorandum (it didn’t even become an executive order) does nothing to push back the implementation of the DoL’s rule—all it says is that the Labor Secretary should basically do more analysis on the matter, and if they find problems, they should take steps to revise the rule. The original draft included a provision to delay, but the administration deleted it. If you interpret that to be “politics as usual,” you’re not alone on that front. While this piece does a nice job explaining the various scenarios at play, the most important point here: “In any event, though, the bottom line is simply this: it’s still game on when it comes to the fiduciary rule.” For investors, however, this really doesn’t change anything in terms of doing your due diligence when seeking financial advice—the onus is still on you to find an adviser who best matches up with your values. A rule, no matter how well-crafted and intentioned, simply can’t do that work for you—and this rule, as it happens, is mostly an exercise in paperwork and fodder for plaintiff’s attorneys."

[thisisallen]

Yesterday there was an article in the WSJ today that raises the question that if the DOL rule is cancelled then would the SEC step in to create a rule to benefit investors.

https://www.wsj.com/articles/amid-threa ... 1486656208

[Pointedstick]

The elephant in the room is that most people should not be invested in financial markets. And in ye olden days, they weren't: they put their money in a bank account or in CDs, where it earned 3-6% interest, and that was good enough. Perpetually low interest rates drive the financially ignorant into the hands of the investment markets, where it's practically impossible to prevent them from being exploited or simply making bad decisions over and over again.

No rulemaking can resolve this. If interest rates on bank accounts and CDs ever go back to being reasonably attractive, I expect the problem will solve itself as people who were never comfortable with the financial markets bail out and go back to just saving with banks.

[Ad Orientem]

Eh. During the heyday of the gold standard bank accounts rarely paid over 2%.

[dualstow]

The elephant in the room is that most people should not be invested in financial markets.

Well, not without benevolent guidance.

[whatchamacallit]

The elephant in the room is that most people should not be invested in financial markets.

I never thought about that. I don't think my grandparents every bought stocks. They did just fine on bank CDs and Treasury savings bonds.

On further thoughts, does Dodd Frank prevent the banks from being able to invest the cash which would allow paying higher internet rates on CDs?

[ochotona]

The elephant in the room is that most people should not be invested in financial markets.

I never thought about that. I don't think my grandparents every bought stocks. They did just fine on bank CDs and Treasury savings bonds.

On further thoughts, does Dodd Frank prevent the banks from being able to invest the cash which would allow paying higher internet rates on CDs?

The children who lived through the 1929 Crash and it's aftermath never wanted to own stocks, many of them. After the crashes of 2000, 2008, and when's the next one, many of those young people will also grow up to not want stocks.

[flyingpylon]

The children who lived through the 1929 Crash and it's aftermath never wanted to own stocks, many of them. After the crashes of 2000, 2008, and when's the next one, many of those young people will also grow up to not want stocks.

The more recent crashes certainly made me want less stocks, which is how I ended up here. Pretty sure I no longer qualify as "young people" though.

[ochotona]

The children who lived through the 1929 Crash and it's aftermath never wanted to own stocks, many of them. After the crashes of 2000, 2008, and when's the next one, many of those young people will also grow up to not want stocks.

The more recent crashes certainly made me want less stocks, which is how I ended up here. Pretty sure I no longer qualify as "young people" though.

People who were teens or 20s in 2000 would be 30s now.

[Libertarian666]

Eh. During the heyday of the gold standard bank accounts rarely paid over 2%.

Which was 2% real and with a 0% expense ratio.

A lot of people would love that. I know I would.

[WiseOne]

The elephant in the room is that most people should not be invested in financial markets.

I never thought about that. I don't think my grandparents every bought stocks. They did just fine on bank CDs and Treasury savings bonds.

That's because stocks were VERY expensive and complicated to buy. Typically you'd pay hundreds of dollars to a broker per transaction, and you'd get stock certificates that you'd put into a safe deposit box. Not many people could afford to play that game.

However, given that few people have even a $1,000 cushion to their name, I doubt there are many investing their taxable savings even now. The issue is 401Ks. In the Good Old Days, you got a pension that required no work on your part. I've wondered whether 401K plans should have a default option of buying into a group annuity that is effectively a pension that you pay into on a voluntary basis, and can't touch until you start collecting payments sometime after age 59.5. This is kind of what TIAA-CREF does already, so it can work. Expecting that 300 million people will successfully manage their own retirement investments just seems totally unrealistic to me, from scratch.

[dualstow]

...
The issue is 401Ks. In the Good Old Days, you got a pension that required no work on your part. I've wondered whether 401K plans should have a default option of buying into a group annuity that is effectively a pension that you pay into on a voluntary basis, and can't touch until you start collecting payments sometime after age 59.5. This is kind of what TIAA-CREF does already, so it can work. Expecting that 300 million people will successfully manage their own retirement investments just seems totally unrealistic to me, from scratch.

I don't know if it was posted at this forum, but recently there was an article about how most architects of the 401(k) regret their creation. The same article showed the % of people who had pensions in the 50's (in the States) and how many have them now. Depressing.

[Pointedstick]

Makes sense to me. Most people simply aren't wired up to be able to manage a financial portfolio. It doesn't help that 401k, IRA, and other accounts are inherently complex, both in operation, and at tax time. Heck, the complexity is nightmarish even for people like us!

[dualstow]

I guess it would be nightmarish for me, but I have an accountant. I'm only in the 15% bracket, but he's inexpensive, and this lets me spend more time reading a book or watching 'Stranger Things' during tax season. That's why God created accountants.

[Maddy]

It seems to be happening everywhere. In my state, the real estate lobby successfully pushed through legislation declaring that real estate brokers and agents no longer have fiduciary duties toward their clients. The ink hadn't even dried on that bill before the regional multiple listing association changed its form purchase and sale agreement to remove one of the most critically important provisions necessary to protect the interests of buyers. The reason? Making it possible for buyers to sue sellers has the secondary effect of causing agents and brokers to be sued as well.

And just this week we have Eric Holder, having previously represented the U.S. government in his role as an attorney-fiduciary, accepting a contract to advise the state of California with respect to strategies expressly designed to undermine his former client. Back in my day, you got disbarred for that.

The watchword these days is caveat emptor. IMHO, you'd be a fool to enter into a contract with any so-called "professional" without a written understanding that all the usual fiduciary duties apply.

EDIT: On another front, isn't Dodd-Frank the legislation that relegated money market and bank account holders to the status of unsecured creditors, making "bail-ins" the new model for failed financial institutions?

[Libertarian666]

It seems to be happening everywhere. In my state, the real estate lobby successfully pushed through legislation declaring that real estate brokers and agents no longer have fiduciary duties toward their clients. The ink hadn't even dried on that bill before the regional multiple listing association changed its form purchase and sale agreement to remove one of the most critically important provisions necessary to protect the interests of buyers. The reason? Making it possible for buyers to sue sellers has the secondary effect of causing agents and brokers to be sued as well.

And just this week we have Eric Holder, having previously represented the U.S. government in his role as an attorney-fiduciary, accepting a contract to advise the state of California with respect to strategies expressly designed to undermine his former client. Back in my day, you got disbarred for that.

The watchword these days is caveat emptor. IMHO, you'd be a fool to enter into a contract with any so-called "professional" without a written understanding that all the usual fiduciary duties apply.

EDIT: On another front, isn't Dodd-Frank the legislation that relegated money market and bank account holders to the status of unsecured creditors, making "bail-ins" the new model for failed financial institutions?

I passed the life insurance licensing test last year, and it was very clear that insurance agents have a fiduciary responsibility to their clients. So that's one profession where that duty exists.

[WiseOne]

The watchword these days is caveat emptor. IMHO, you'd be a fool to enter into a contract with any so-called "professional" without a written understanding that all the usual fiduciary duties apply.

So apparently we need to be protected from false information posted on the Internet, but not from professionals that we pay for service that is not required to be in our best interests?

Hilarious, but scary.