Congress Wants to Screw You

The following is a screenshot I took from Speaker of the House Paul Ryan’s website. It has not been altered in any way:

This is an appalling bit of propaganda (you can see the original here if you want).

If you don’t know, Speaker Ryan is talking about the Fiduciary Rule. Obviously, Ryan wants you to think the Fiduciary Rule is bad for you and bad for small individual investors. He wants you to believe you need to be protected from this Fiduciary Rule. He is counting on you not knowing what the Fiduciary Rule actually means and that you won’t try to find out.

Investopedia has this to say about a fiduciary:

When a party knowingly accepts a fiduciary duty on behalf of another party, they are required to act in the best interest of the party whose assets they are managing. The fiduciary is expected to manage the assets for the benefit of the other person rather than for his or her own profit, and cannot benefit personally from their management of assets.

That doesn’t sound so bad, does it? Shouldn’t a financial advisor have to put your interests above his/her own? Actually no. It might be surprising to learn that some investment advisors are not fiduciaries at all. Right now it is perfectly legal for them to put their own interests above those of the people they are advising.

That’s why Reuters says the Fiduciary Rule “…will reshape the retirement advice business because it will require banks, brokers, mutual fund companies and insurance agents to keep fees low and protect your savings from excessive risk when they advise you, rather than focus on how much they can earn in commissions.”

So why does Ryan want to fight this rule? Why does he say that it will result in higher costs and restrict access to quality investment advice for millions of Americans?

It’s pretty simple really. The investment advisors that Ryan is talking about make commissions based on what assets they choose for their clients’ money. And there are a lot of ways investment advisers can invest your money that will mean big commissions for them. So basically, Speaker Ryan thinks that investment advisors should be allowed to gouge you and line their own pockets by putting your money in investments that come with high fees and commissions.

According to Speaker Ryan, if the poor investment advisor can’t gouge you with exorbitant commissions, well, he or she just won’t be able to “help” you at all. This is just wrong.

Protecting the Wall Street Wolves

It’s pretty clear that Speaker Ryan wants to protect the Wall Street wolves. I guess he’d rather keep the campaign contributions and fancy dinners with lobbyists coming than actually look out for the people who elected him in the first place.

There’s a word for people who will do anything for money…

Speaker Ryan wants you to think that investment advice will get more expensive if investment advisors can’t gouge you. That’s just not true. At least if you consider commissions and fees part of your costs…

Have you ever heard of a non-traded REIT?

A non-traded REIT is a real estate investment trust (REIT) that doesn’t trade on a stock exchange like the New York Stock Exchange or the NASDAQ. It’s basically a start-up, in the raising-cash phase.

Non-traded REITs don’t have to report estimated per-share value until 18 months after they are done raising funds. The fundraising might take two or three years. In other words, it could be years before an investor in a non-traded REIT has any idea what the REIT is actually worth.

But here’s why some investment advisors love them: non-traded REITs can carry a huge 10% commission right off the top. Of that, 7% goes to the broker that recommends them.

In 2013, broker-dealers sold $20 billion in non-traded REITs. That’s $1.4 billion in commissions that came out of some people’s retirement savings and went right into brokers’ pockets.

If you ever have a broker suggest a non-traded REIT to you, you can be pretty sure he or she is ripping you off. And Speaker Ryan wants to make sure they can continue ripping you off.

JP Morgan $307 Million Fine

Here’s another example of the kind of behavior Ryan is trying to protect…

Back in December, JP Morgan (NYSE: JPM) paid a $307 million fine for basically not acting as a fiduciary…

The following description is from a Reuters article:

JP Morgan “…agreed to pay $307 million to settle accusations by the U.S. Securities and Exchange Commission (SEC) that brokers and advisors in several JPMorgan divisions steered clients into its own, more expensive investment products over other choices without making the required disclosures to clients about conflicts of interest.

…the company chose mutual funds with more expensive retail fees over identical – but less expensive – institutional funds.

The bank will pay $267 million to the SEC, and $40 million to the Commodity Futures Trading Commission, which also conducted an investigation.

The SEC cease-and-desist order describes the violations as willful, fraudulent and deceitful, and identifies $127 million in ill-gotten gains generated through JP Morgan’s disclosure failure.

The bank admitted to wrongdoing, but no restitution will be made to customers. The bank said in a public statement its only misstep was inadequate disclosure of what it sells to customers.

“The bottom line is, in a nonfiduciary world, JPMorgan can do anything it wants to,” says Sheryl Garrett, founder of the Garrett Planning Network of fee-only RIAs, and a key fiduciary advocate. “In a fiduciary world, if advisors told clients to roll over an IRA or 401(k) into these types of funds, every single customer affected would be in a class action lawsuit going after them.”

A Few Bad Apples…

Now, I want to be clear about something. Not all investment advisors engage in the shameful, predatory behavior that Speaker Ryan is trying to protect. Many investment advisors and financial planners voluntarily become fiduciaries because it’s the right thing to do.

And if you know what to look for and what questions to ask, you can make sure you won’t get gouged. Always ask an advisor if they are a fiduciary. Always make sure you understand the fee structure of an investment. Some investments have a load fee, which you pay when you buy it. Then an annual management fee, and maybe even an exit fee if you sell the asset before a certain amount of time has passed.

Ask the right questions and you’ll get the right answers. I’d sure love to ask Speaker Paul Ryan why he’s so interested in protecting the Wall Street wolves at the expense of regular American investors trying to save for their retirements…

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.