NYT Editorial: Financial Advisers Should Act Solely in the Interests of Their Clients

From yesterday’s New York Times:

Successful Investing for the Long Haul

By THE EDITORIAL BOARD APRIL 8, 2015

For more than a month now, the White House has been vetting a proposal by the Labor Department that would require financial advisers to act solely in the interests of clients when giving advice on retirement accounts.

The White House should move the process forward without further delay. Its own research has shown that biased advice costs retirement investors billions of dollars a year in excess fees and commissions.

Prompt issuance of a so-called fiduciary rule for retirement advisers would also send a signal to the Securities and Exchange Commission, which has balked at imposing a similar duty on all the various financial professionals who give advice on nonretirement investments.

This week, an article in The Times by Jeff Sommer indicated how such a rule might change the nature of financial advice for the better.

The article looked at the latest evidence on whether it is possible to beat the stock market over time. As in past studies, the answers ranged from “no” to “most probably not,” depending on the measures used. One of the studies compared actively managed domestic stock funds, in which managers buy and sell stocks in an attempt to outperform the market, with the Standard & Poor’s 1,500 index, a proxy for the total United States stock market. At least three-quarters of actively managed mutual funds failed to beat the index over three, five and 10 years.

If all advisers had a fiduciary duty to their clients, stock recommendations would focus mostly if not entirely on low-cost index funds, which don’t try to beat the market but merely to match it. Index funds are not lucrative for commission-based advisers to recommend because they don’t generate the fees and commissions associated with active trading. But they would be better for investors who would be zeroing in on the best long-term return they can reasonably expect at the lowest possible cost.

Even if index investing became the norm, many people would still need advice on, say, budgeting and goal setting, allocating their holdings among different asset classes, choosing funds and handling specific financial challenges. Such services, delivered by advisers who have a duty to act in investors’ best interests, would clearly be valuable — and an improvement over current practices that all too often steer investors to high-cost products and strategies when lower-cost ones offer a better deal.

Posted by on April 9th, 2015 at 7:21 am


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