04-06-2016, 06:36 AM (This post was last modified: 04-06-2016, 07:21 AM by Caversham.)
Over the past couple of days, the WSJ has published multiple articles describing that the US government plans to enact new laws that will affect retirement accounts (IRA, 401k, etc). The majority of the laws impact financial advisors and what they can recommend to clients, but the laws could also impact self-directed investors such as DGIers.
I know that some WSJ articles are behind paywalls, so I've included some of the most important quotes from the articles below.
Quote:Many brokerage firms plan to steer IRA investors who now pay commissions into accounts that charge annual fees of up to 1% or more.
Quote:Some brokerages and financial-advisory firms have warned that they may shed investors with smaller nest eggs—such as, $50,000 or less—because these accounts may no longer be profitable for the company to serve under fee-based arrangements. Others may shift small-balance clients into new stripped-down fee accounts, including with affiliated automated “robo” advisory services.
Quote:Some brokers will continue to accept commissions. But to do so, they must ask clients to sign a “best interest contract” that requires the adviser to act in the investor’s best interests and includes information about the firm’s conflicts of interest. They must also make more detailed disclosure about costs and fees available to investors who request it.
Quote:Firms will be required to acknowledge their fiduciary status and make “basic disclosures of conflicts of interest” by April 2017. They will have until Jan. 1, 2018, to comply with the rule’s other provisions and disclosures.
As many of us know, one benefit of DGI is the low fees. We pay ~$5 once to buy stock, and there are no more fees associated with that stock purchase for the rest of our life. The government's proposed 1% annual fee is absolutely ridiculous. I will wait to see how things shake out, but I may need to change which brokerage manages my IRA.
(04-06-2016, 06:36 AM)Caversham Wrote: As many of us know, one benefit of DGI is the low fees. We pay ~$5 once to buy stock, and there are no more fees associated with that stock purchase for the rest of our life. The government's proposed 1% annual fee is absolutely ridiculous. I will wait to see how things shake out, but I may need to change which brokerage manages my IRA.
A 1% annual fee would be a travesty and would do nothing but make the bankers richer and the masses poorer.
$1000 per year on a $100k portfolio? Absolutely ridiculous.
(04-06-2016, 12:15 PM)Bogart Wrote: It seems like a backdoor way of the government getting their hands on our untouchable retirement money through increased bank/brokerage revenue taxes.
It sure does. They have to get their hands into everything.
Really? That much of a knee-jerk reaction? Did you read what Caversham excerpted?
Many brokerage firms plan to steer IRA investors who now pay commissions into accounts that charge annual fees of up to 1% or more.
I searched (and read deeper in some sections) all the proposed notices of rulemaking. See here. Most are scheduled to be published in the Federal Register on April 8th according to the notices on the individual sections. Nowhere does it state the government will levy a fee, fine or charge of any type of 1% or otherwise on end-user investors. Fines for those not adhering to the "fiduciary rule" are proposed which, in my opinion, is fine. Perhaps the underline will help clarify it.
Some brokerages and financial-advisory firms have warned that they may shed investors with smaller nest eggs—such as, $50,000 or less—because these accounts may no longer be profitable for the company to serve under fee-based arrangements. Others may shift small-balance clients into new stripped-down fee accounts, including with affiliated automated “robo” advisory services.
No longer profitable? I'm guessing the fees they've already been skimming are pretty high if they were profitable now but not in the future. For all you that argue about keeping commissions low and avoiding the recurring charges of management fees by funds by becoming self-directed investors must be pretty happy that the uneducated person saving for retirement is getting f$^&3 over by the hot-shot investment houses. I'm not.
Some brokers will continue to accept commissions. But to do so, they must ask clients to sign a “best interest contract” that requires the adviser to act in the investor’s best interests and includes information about the firm’s conflicts of interest. They must also make more detailed disclosure about costs and fees available to investors who request it.
The problem? Do you wait to open your brokerage statement before you find out what commission you paid for any transactions? I don't see a problem with being told up front how much I'm going to pay for a particular service. If a persons thinks it's worth it, there's nothing stopping him from paying it.
As many of us know, one benefit of DGI is the low fees. We pay ~$5 once to buy stock, and there are no more fees associated with that stock purchase for the rest of our life. The government's proposed 1% annual fee is absolutely ridiculous. I will wait to see how things shake out, but I may need to change which brokerage manages my IRA.
Yup, I agree with the low fees for B&H'ers. However, if the government is going to charge 1% annually (which it's not), what difference does it make which brokerage you use? Don't get the logic.
Basically, the proposed rules are trying to do is to make the advisor work in the best interest of the investor and disclose up front how much it's going to cost. RIA's are already required to follow these rules so what's the beef?
From the proposed rule:
Quote:As amended, the Regulation provides that a person renders investment advice with respect to assets of a plan or IRA if, among other things, the person provides, directly to a plan, a plan fiduciary, plan participant or beneficiary, IRA or IRA owner, the following types of advice, for a fee or other compensation, whether direct or indirect:
(i) A recommendation as to the advisability of acquiring, holding, disposing of, or exchanging, securities or other investment property, or a recommendation as to how securities or other investment property should be invested after the securities or other investment property are rolled over, transferred or distributed from the plan or IRA; and
(ii) A recommendation as to the management of securities or other investment property, including, among other things, recommendations on investment policies or strategies, portfolio composition, selection of other persons to provide investment advice or investment management services, types of investment account arrangements (brokerage versus advisory), or recommendations with respect to rollovers, transfers or distributions from a plan or IRA, including whether, in what amount, in what form, and to what destination such a rollover, transfer or distribution should be made.
I've heard first- and second-hand (from a tax advisor) on what some "investment bankers" do to pull in another juicy commission. I'm not surprised the WSJ wrote about all these sensational articles. Consider their biggest constituency.
Maybe Fidelity will stop hounding me with emails and letters about how my 401(k) at my new employer is not adequate because I'm not diversified enough. 90% in the closest funds I could get to dividend growth investing and 10% in cash for the next pullback was the best I could do. Junk bond funds? You must be kidding.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
DW has it right. Nobody is proposing imposing additional fees on customers that buy their own shares. This is primarily about managed money, which most DGers shun like the plague. And the rest of it is largely the "doom and gloom" that the financial players used in fighting the new standards.
Money managers are likely to make somewhat less obscene profits as a result of these changes. Rather than get huge commissions for selling promoted products (under the current "suitability" standard), they'll have to take a fee based on assets under management (while honoring the fiduciary standard). Because they didn't want this cash cow to be killed, they fought these new rules vigorously. In fighting the new standard, they made all sorts of stupid arguments trying to scare the administration out of its position. Among those arguments were "we'll have to dump small investors" and "we'll have to impose higher fees" etc. etc. It is mostly nonsense. And I'm hardly surprised that the WSJ emphasized those positions.
My sense is that these new standards are overdue and good for just about everyone except the folks who were making ridiculous commissions selling inappropriate investments to their "clients."
04-07-2016, 06:34 PM (This post was last modified: 04-07-2016, 06:34 PM by Caversham.)
I can see how my "The government's proposed 1% annual fee is absolutely ridiculous" statement was really unclear.
However, my understanding is still this: Some brokerages (Schwab, Fidelty, Scottrade, E*Trade, etc) will begin charging annual fees as opposed to commissions. If my brokerage does this, then I will need to move my IRA. Is this not correct?
(04-07-2016, 06:34 PM)Caversham Wrote: However, my understanding is still this: Some brokerages (Schwab, Fidelty, Scottrade, E*Trade, etc) will begin charging annual fees as opposed to commissions. If my brokerage does this, then I will need to move my IRA. Is this not correct?
Did they tell you that? The competition is fierce for brokerage customers. I can assume they might for managed accounts if they can make more money from a flat fee rather than commissions but none of it is set in stone until they publish their fee schedule. I know TD Ameritrade has really been pushing their managed/advisory accounts for a while.
On the flip side, this regulation has been in the proposed stage for several years and it will take some time to implement so it's not like it's a newsflash. In any case, the government won't get any of those fees unlike what the discussion had devolved to. It will all flow to the brokerage house.
Then again, I don't get the whole Assets Under Management (AUM) rip off fees, either. Why is it a 40 year old who has $250,000 to invest and gets told to put 60% in an S&P 500 index fund and 40% in a medium term government bond fund* get charged a higher fee than someone with only $100,000 to invest with the same recommendation. On top of that, some (many?) investment advisors will steer an uneducated investor to an Oppenheimer or American Funds index mutual fund with a 5-7% load on top of the fund's management and 12b-1 fees. They give the same recommendation to both but one pays a higher "actual dollars" fee. There no creative difference of effort there.
* The funds are just examples. Just pick your own variant of a MPT fund allocation.
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“While the dividend itself is merely a rearrangement of equity, over time it's more like owning an apple tree. The tree grows the apples back again and again and again, and the theoretical value of the tree doesn't change just because of when the apples are about to fall.” - earthtodan
(04-07-2016, 06:34 PM)Caversham Wrote: However, my understanding is still this: Some brokerages (Schwab, Fidelty, Scottrade, E*Trade, etc) will begin charging annual fees as opposed to commissions. If my brokerage does this, then I will need to move my IRA. Is this not correct?
Did they tell you that? The competition is fierce for brokerage customers. I can assume they might for managed accounts if they can make more money from a flat fee rather than commissions but none of it is set in stone until they publish their fee schedule. I know TD Ameritrade has really been pushing their managed/advisory accounts for a while.
I think that's it. For money that they are actively managing for a customer for money, they will have to migrate from commissions to percentage fee because commission will not be so lucrative anymore. But this should not affect the commissions we pay to buy our shares.
And I agree that paying 1 percent to someone to throw you hard-earned money into what for most is essentially a balanced fund and then ignore it forever while collecting fees is unconscionable. But lots of people are really intimidated by investing, and they think they need a professional, as opposed to a few hours of reading. I have a sibling who fell into this trap. Put her IRA with a guy that her husband's family has used forever. When she realized I kinda know a little about this, she had me look over her holdings. I almost barfed. Eight different funds -- every single one of which had a front-end load of 3.75 to 5.75 percent, plus expense ratios way over average. We dumped that dude as fast as possible and moved her over to Vanguard. Got better funds for a tiny fraction of the cost. The guy has probably made a mint off the in-laws over the years. Ridiculous.
(04-07-2016, 06:34 PM)Caversham Wrote: However, my understanding is still this: Some brokerages (Schwab, Fidelty, Scottrade, E*Trade, etc) will begin charging annual fees as opposed to commissions. If my brokerage does this, then I will need to move my IRA. Is this not correct?
Did they tell you that? The competition is fierce for brokerage customers. I can assume they might for managed accounts if they can make more money from a flat fee rather than commissions but none of it is set in stone until they publish their fee schedule. I know TD Ameritrade has really been pushing their managed/advisory accounts for a while.
I think that's it. For money that they are actively managing for a customer for money, they will have to migrate from commissions to percentage fee because commission will not be so lucrative anymore. But this should not affect the commissions we pay to buy our shares.
And I agree that paying 1 percent to someone to throw you hard-earned money into what for most is essentially a balanced fund and then ignore it forever while collecting fees is unconscionable. But lots of people are really intimidated by investing, and they think they need a professional, as opposed to a few hours of reading. I have a sibling who fell into this trap. Put her IRA with a guy that her husband's family has used forever. When she realized I kinda know a little about this, she had me look over her holdings. I almost barfed. Eight different funds -- every single one of which had a front-end load of 3.75 to 5.75 percent, plus expense ratios way over average. We dumped that dude as fast as possible and moved her over to Vanguard. Got better funds for a tiny fraction of the cost. The guy has probably made a mint off the in-laws over the years. Ridiculous.
