March 24, 2016

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London Calling

"Wonky Talk” is FSR’s new blog series that boils down political and regulatory issues from Washington into plain English for the average American.

London Calling
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“Wonky Talk” is FSR’s new blog series that boils down political and regulatory issues from Washington into plain English for the average American.”

Following the August 24, 2015 flash crash, I wrote about the need for investors to have access to financial help in times of turmoil.  My blog post, The Markets, DoL, Trump, and What we can Learn from the UK  highlighted an effort in England to examine regulatory changes that have resulted in a reported “advice gap” following the UK banning commission-based compensation in connection with financial services.

The verdict? The advice gap exists. Financial Advice Market Review (FAMR) states, “The move to fee-based advice on retail investment products has improved transparency and ended conflicts of interest caused by a mainly commission-driven model. However, advice is expensive and is not always cost-effective for consumers, particularly those seeking help in relation to smaller amounts of money or with simpler needs.”

The subject of financial advice and the impending regulatory changes that will imminently reshape the delivery of retirement services in the U.S. has been a source of intense debate in Washington and across the industry. Known as the “Department of Labor Fiduciary Rule,” many across the political spectrum have warned of the potential for modest-income investors to lose access to affordable advice and services if this rule is implemented.

As one person said to me recently, “This is the biggest issue that no one is talking about.” That’s true. This wonky rule will be a watershed moment for the future of retirement savings, and yet it doesn’t involve the size of Trump’s hands or Hillary’s “damn emails”, so it hasn’t made it into the mainstream discourse that drives viewership.

That’s frustrating, but what’s even more disturbing is that the folks who are paying attention are aware of the parallels in the UK and have the opportunity to learn from their findings. According to the report, the UK has identified “a series of measures aimed at stimulating the development of a market that provides affordable and accessible financial advice and guidance for everyone, at all stages of their lives. It also contains proposals designed to increase consumer engagement with financial advice.”

The goal of U.S. and UK regulators has always been to root out bad advisors and make sure investors have access to quality advice and services that is in their best interest. That goal is indisputable, but to achieve that end regulators must not compromise affordability.  This challenge gets to the core of the issue. What is the best way to achieve the right balance between consumer protection and a regulatory environment that fosters cost effective services?

FSR believes the best way to achieve that balance is to give consumers clear and concise information about the services and expenses, let consumers make choices, and then hold bad actors that don’t play by the rules accountable.

We outlined those specifics in our comments to the Department of Labor. We strongly urge a more pragmatic approach than turning the existing marketplace on its head and expecting the industry to implement the dramatic changes in a few short months.

We remain hopeful the Department has heeded our comments, but recently found a reason for additional concern when the DoL released a notice on February 29 detailing a new research project. In the notice, it states, “Relatively little is known about how people make planning and financial decisions before and during retirement.” It further states, “Gaining insight into Americans’ decision-making processes and experiences will provide policy-makers and the research community with valuable information that can be used to guide future policy and research.”

So, the U.S. financial services industry is readying for a major shift in the delivery of retirement income services based on a rule required by an agency that states it needs more data to understand how people make their financial decisions about retirement? Talk about putting the cart before the horse.

That concern is validated upon reading the UK findings. The report states, “The Review had a wide scope, and looked across the entire financial services market in order to assess the availability of advice and guidance to help people with their financial decision-making, particularly those who do not have significant wealth or income. FAMR did not look solely at advice in a formal regulatory sense. Instead it considered consumer needs and preferences for different types of help with their financial decision-making and the potential barriers to the provision of these services. As such, it considered a number of issues, including the regulatory and legal framework, the economics of providing advice, consumer engagement and the role of technology.”

There’s a famous quote, “England and America are two countries separated by a common language.”  The message is a reminder that our countries, while different in some ways, have many commonalities. One of those similarities is that Americans and the British must be self-reliant to manage our retirement savings, which means that many people need access to quality and affordable help.  The UK has learned some valuable information that can inform our efforts in the U.S. We already speak the same language, so why not communicate and learn from one another?