The rule changes for financial advisors that came out on Wednesday created a modest stir in the financial industry. While there are over 1,000 pages in the new guidelines, the one change that hit a nerve was a requirement that anyone who gives investment advice for a fee has to act with the client’s best interests in mind.
For many people, I expect that the big shock is that any financial advisor would ever give advice that wasn’t in the client’s best interests! But apparently this practice was common enough that it needed a regulation to change it. So there it is.
It’s hard to tell how big the impact of this rule change might have on the financial industry, because there’s really no way to know how many investment advisors were looking out for themselves, not their clients.
And let me say right here, that I have no objections (in principle) to fee-based investing advice. There are a lot of people out there who have no interest in handling their own investment funds. Maybe they don’t have the time, maybe money makes them nervous, maybe (as TIAA CREF says) they have better things to do.
And I have no doubt that most financial industry advisors are responsible, ethical and look out for their clients’ needs.
But, until now, there hasn’t been any legal constraint if they wanted to do the exact opposite.
Take the relatively innocuous-sounding issue of commissions. Until now, if an advisor wanted to recommend a mutual fund with higher fees and/or worse performance in order to collect a higher sales commission, that was perfectly legal. And it’s a common way for a company to increase sales.
Decades ago, during a brief stint in the retail industry, I ran into the phenomenon of SPIFs, which are Sales Performance Incentive Fund commissions. I could earn a SPIF for selling a particular item that my employer wanted to push. And so I did.
The SPIFs (or their equivalent) are all over the financial industry. Advisors can get an extra cut for recommending certain products, like funds from a particular company.
And until now, there was no regulation that required the advisor to reveal this extra commission to the client. In fact, advisors weren’t legally bound to reveal any kind of conflict of interest.
Under the new regulations, any professional in the financial industry who gives you advice about what to do with your retirement money must act as a fiduciary, that is, putting their clients’ financial interests ahead of their own.
Critics of the new rules from the Labor Department decry the increased regulation as a government intrusion. But I have no sympathy for that position. Anyone who increases his profit by taking advantage of the trust of his clients doesn’t deserve my sympathy. It’s a hell of a way to make a living.
The new rules will probably create some confusion, as clients must now be given contracts that reveal the SPIFs, commissions and special arrangements that bear on the advisor’s investment decisions. But as far as I’m concerned, the new rules are all to the good.
One of the keystones of Cabot’s business is that the person most likely to look out for your financial best interests is you. In our advisories, we strive to find the best opportunities in the asset classes we cover and to tell you how to manage them. Our constant goal is to help you make money. And if you succeed, you’ll renew your subscription with us—which is how we succeed! Nobody SPIFs us and we take no commissions from anyone. You are our only clients, and we want to make you the smartest, market-savviest investor on your block. It’s how we do business.
One of the advantages of doing business this way is that we welcome chances to interact with our subscribers. We follow up on our recommendations, we answer questions, we offer special reports on investing topics and opportunities.
Another way we serve our subscribers is by putting on the Cabot Investors Conference every August. This year, the Conference will kick off on August 10 and wrap up on August 12. It’s a chance to meet all of our analysts face-to-face, to get to know us and to let us get to know you and what’s on your mind.
It’s a concentrated investment seminar, with programs on stock analysis and investing in every style, from growth and value to income and options. It’s also a heck of a lot of fun, and gives participants an annual refresher on how to handle your own money.
And if it also happens to give you a chance to visit scenic New England in the late summer, well that’s all to the good. And Cabot will give you a chance to see Salem—the Witch City—like you’ve never seen it before. A quick click here will reserve your place.
This Week’s Fortune Cookie
Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.
Tim’s comment: I agree wholeheartedly, so today, as the market rolls over into a well-deserved correction after two solid months up, I believe short-term traders should take some profits.
Paul’s comment: I love Warren Buffet’s sense of humor; he seems like the most relaxed really rich guy I know of. And his strategy of selling into rallies and buying into corrections makes sense … for a value guy. But as a growth investor, I prefer to just appreciate his humor and follow my growth disciplines.
Sincerely,
Paul Goodwin
Chief Analyst of Cabot Global Stocks Explorer
