Bob Powell of the Wall Street Journal's MarketWatch asked me to comment on the film for his Retirement Weekly column. My comments are below.
Stephen Carr, CFA, Director of Research, Peloton Wealth Strategists:
"Martin Smith’s Frontline documentary “The Retirement
Gamble,” had me jumping up and down with enthusiasm. Yes, there were a few points where I cringed,
but for the most part, Smith gets it right: compensation practices in the
investment advisory business are really, really gross. There’s so much that’s wrong; where to begin?
Fee opacity is a good place to start. Think about this: what percentage of annuity
investors would ever buy one if they truly understood that their total annual
expense ratio was north of 2% or 3% and that, if they need to access their
money before the 7, 10, or 20 year surrender period had ended, they’d need to
pay an exorbitant penalty? The same can
be asked of mutual fund 12b-1 fees.
Compensation structure is also a key point raised in the
film and, unfortunately, most financial advisors are compensated for selling
so-called “financial products.” Financial products are co-mingled vehicles
like mutual funds, annuities, and unit trusts.
Virtually the entire advisory business is designed not to tailor
investment solutions to the needs of individuals, but to distribute these
products. Armies of financial advisors
are incentivized as “asset gatherers” or “relationship managers.” They’re not really expected (and certainly
aren’t compensated) to be great investors of their clients’ money. Frankly, if a financial advisor is at all
knowledgeable as an investor, it’s purely coincidental.
Whether, as the film suggests, more regulation is called for
is debatable. The only certain way bad
practices get corrected is by investors demanding improvement. Investors can make three demands that will go
a long way toward righting this ship.
First, investors need to understand that contrary to Peter
Lynch’s claim in the film, investing well is actually difficult. When choosing an advisor, investors should,
when possible, hire a money manager who utilizes individual securities, not
financial products. Individual
securities carry no fees, so the total cost is limited to the management fee
and some commissions (which are frequently very cheap these days). Increasingly 401(k) plans offer employees the
option to “self-direct,” which would allow a third party money manager to
invest on behalf of the individual.
Secondly, investors should limit how much they’re willing to
pay for management. Jack Bogle gets it
right: investors should keep total costs to 1% or less. While Bogle seems to falsely equate indexing
with low-cost investing, the two are not identical. There are numerous reasons why an individual
might not want to assume the risk associated with particular index funds, but
that doesn’t mean that the only other alternative is high-cost, poor
performance.
Finally, the fiduciary standard is critical. Two well-regarded designations that require
advisors to uphold a fiduciary standard are the Chartered Financial Analyst
(CFA) and the Certified Financial Planner (CFP). Professionals holding these designations have
attained a certain level of industry experience and are required to put their
clients’ best interests ahead of their own compensation.
My hope is that one day, investment advisors will be held in
the same high regard as other professional service providers. But while some advisors have earned that
honor, many others continue to pollute the industry with selfish ambition. Until investors begin demanding more
honorable compensation practices from their advisors, there will be very little
incentive for change."
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