Adviser Regs allow misconduct

David MoonBlog

By David Moon

Lost in the noise of the presidential primaries is a Washington fight that pits Congress and its Wall Street allies against you—and you don’t even know it. Congress is attempting to prevent a regulation that would require retirement plan investment advisers to act in their clients’ best interest.

That’s correct; majorities in the House and Senate are trying to stop a proposed Department of Labor regulation that requires advisers to act in the best interests of their 401(k) and IRA clients.

Because of the way they choose to organize, some paid financial helpers are legally considered salesmen, not fiduciary advisers. While spending millions of advertising dollars to convince you of the value of their advice, these firms also spend millions of lobbying dollars convincing regulators that they aren’t technically advisers.

The Department of Labor doesn’t have regulatory authority over investment advisers, but it does regulate retirement plans—and it wants anyone who advises retirement plans to be required to place client interests before their own.

Opponents of the regulation argue that if advisers were required to act only in their clients’ best interests, they would be precluded from selling some of their most lucrative products and would likely refrain from serving smaller investors.

That argument is insulting. It assumes that overly-expensive conflicted advice, riddled with hidden fees, is preferable to no advice at all.

Even compared to high-profile Ponzi schemes, I am convinced that the largest dollar amounts of client “theft” occurs via excess fees, a little at a time. With the help of enabling legislation, it is completely legal. When choosing among mutual funds, annuities and other structured products to sell you, your broker has no legal obligation to offer the least expensive.

“Disclosure” is hardly a sufficient defense. You can’t morally justify unethical behavior by pretending to tell a would-be victim of your intended malfeasance in the fine print of a 30-page document.

Few industries make it more difficult to understand industry regulation, licensing or compensation than does the investment industry. The relationships and conflicts are complicated, and that’s not an accident.

A March 1, 2016 paper by economists Mark Egan, Gregor Matvos and Amit Seru finds that more than 7 percent of the nation’s registered investment advisers have been disciplined for misconduct or fraud. Repeat offenders make up almost 40 percent of all disciplined advisers. They simply move to another firm and start over.

Some firms are much more likely than others to employ dirty advisers. The authors suggest that some very well-known firms “specialize” in misconduct and cater to unsophisticated consumers.

Misconduct is most likely associated with the sale of insurance and annuity products.

Google “Egan Gregor adviser paper” to find the report. The firm misconduct lists are on page 36.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).