The Lying Elite

Once again, the powerful American elite say they want to help you. They say they are looking out for the average American. They want to help the little guy…

Once again, it’s a lie. 

They don’t want to help you. All they want is to keep lining their pockets at your expense, one hand patting you on the back, the other digging into your wallet. 

The insurance and brokerage industries are spending millions to fight the fiduciary rule. The fiduciary rule says that anyone you pay for giving you investment advice has to put your interests above his or her own. That’s it.

And many people will tell you this is a bad idea — our Speaker of the House Paul Ryan, for one. The U.S. Chamber of Commerce has actually filed a lawsuit in Texas to maintain the status quo and keep the fiduciary rule from becoming law. 

They say this fiduciary rule will mean that small investors won’t get good advice. They say it will hurt small businesses. They say it violates the First Amendment rights of brokers (because brokers’ right to give you bad advice should be protected). 

I am completely mystified by how anyone could look you in the eye and say that someone you are paying for advice shouldn’t be required to give you advice that is best for you. But to understand why they are doing this, you have to understand how compensation in the advisory/brokerage world works. 

$200 Billion a Year

What’s at stake is estimated to be $200 billion a year. That’s the amount of money that gets rolled out of 401(k) plans every year as employees retire or change jobs and into another retirement investment account, like an IRA. 

In total, there is around $25 trillion in retirement accounts. Now, 401(k) plans aren’t particularly great. Fees can typically be pretty big, as much as a couple percent a year eating into your returns. But it’s when money gets rolled over that it comes up for air and is particularly vulnerable. Maybe an insurance company tries to sell you on a variable annuity.

A variable annuity sounds like a great idea. It offers the perception of safety like a regular annuity, while at the same time offering upside potential. A variable annuity invests like a mutual fund, so your income is variable as to whether the stocks go up or down.

The problem with variable annuities is fees. There’s a 7–8% up-front commission, and annual fees can run 3% a year. Plus, the insurance component can take another 1% a year.

Insurance companies offer them because they make a lot of money skimming fees off of your money. What salesman wouldn’t want to take a 7–8% commission? (You should know that MetLife recently paid $25 million to settle a probe of abuses tied to variable annuities. Of course, when a company settles, they don’t admit to any wrongdoing; they just pay up to make the accusation go away.)

Another favorite of the scammers is the 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. Because of this, it can be very hard to sell your shares when the price starts dropping.

Not only that, but non-traded REITs can carry a huge 10% commission right off the top. Of that, 7% goes to the broker that recommends them.

Also, non-traded REITs don’t have to report estimated per-share value until 18 months after they are done raising funds. The fund-raising 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.

Once again, it’s pretty easy to see why a broker would suggest a non-traded REIT, even though these investments are not suitable for the vast majority of investors. 

Buying Votes

It should come as no surprise that insurance companies and brokerages that are benefitting from ripping off retirement savers are fighting the fiduciary rule. They don’t want anything to change. And they are spending a lot of money to fight the fiduciary rule that would end their ability to gouge you…

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The ICI is the Investment Company Institute. Based in Washington, D.C., it’s the national trade association of U.S. investment companies, which includes mutual funds, closed-end funds, exchange-traded funds, and unit investment trusts. The ICI lobbies on behalf of investment companies. 

The American Council of Life Insurers, ACLI, does the same thing for insurance companies. Former Secretary of the Interior Dirk Kempthorne is the CEO. (In 2009, CNN reported that Kempthorne sent $235,000 of taxpayer money to renovate his office bathroom at the Department of Interior. According to Brown, the costs included a shower, a refrigerator, and a freezer hidden behind lavish wood paneling.)

Groups like the ICI and the ACLI say they are looking out for individual investors. They say the fiduciary rule will make investing more expensive for you. But really they just want to keep taking their outrageous fees and commissions. 

Know Your Enemy

I just turned 51. I don’t remember a time when corporate interests so dominated our political system. I guess it happened when the Supreme Court made its infamous “corporations are people too” ruling. That opened the door for corporations to make unlimited campaign donations via PACs.

Now, corporations are essentially hiring senators and reps to push their interests. And the corporations have more money than you do. 

Your best defense is to know what you’re dealing with. Most financial advisors do act as fiduciaries and offer good advice. The first thing you should always do when getting advice is ask if the person is a fiduciary. Next, look out for variable annuities and non-traded REITs. These are not suitable investments. 

And finally, do a little research on retirement investing. Google the term “mutual fund fees” and educate yourself on how they work. A little knowledge can go a long way to making sure you don’t get jerked around by the powerful interests. 

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.