Recently, the Department of Labor released a proposal designed to inhibit conflicts of interest around financial advisor recommendations pertaining to investment product sales and other savings and retirement recommendations.
I love it. As an owner of Berkshire Money Management, a financial advisory firm, I want to be careful about sounding like a self-loathing industry basher. Or, worse, that I am knocking the competition. That is an ugly thing to do. But moving the industry toward a uniform standard whereby every advisor must put the client first, by law, is what clients of financial advisors deserve.
Admittedly, the business owner in me hates any form of compliance enforcement when it is directed specifically at me. Who wants the extra cost or hassle?
Nonetheless, I applaud the White House’s effort to “eliminate junk fees.” I didn’t fact-check the administration’s math, but I agree with their assessment that “these costs add up.” They calculate that “Requiring advisers to make recommendations in the savers’ best interest can increase retirement savers’ returns by between 0.2 [percent] and 1.20 [percent] per year. Over a lifetime, that can add up to 20 [percent] more retirement savings—potentially tens or even hundreds of thousands of dollars per impacted middle-class saver.”
The White House intends to close sales loopholes that allow financial advisors to provide financial advice in which the benefit to the client is merely incidental. Many financial transactions do not have to be in the client’s best interest. For example, the administration cites that “These inadequate protections and misaligned incentives have helped drive sales of fixed index annuities up 25 percent year-to-date.”
I am biased, but paying for investment advice often results in a positive outcome. As famed investor and head of Berkshire Hathaway said, “Cost is what you pay, value is what you get.” Sometimes, the advisor’s job is to provide the client with value they never anticipated. Other times, the client has a good sense of their needs. For example, according to Spectrum Group, 93 percent of people want estate-planning services from their financial advisors. (And, I would assume, that the client doesn’t expect to write another check so long as they are paying a minimum fee). That Spectrum survey is interesting to me in so much that, anecdotally, I find that some families know they need an estate plan. Still, they don’t precisely understand the benefit of an estate plan and how it can shield their family from paying unnecessary taxes. But it is also not all about the money. Below is an excerpt from my book, “Don’t Run Out of Money in Retirement,” to highlight some of an estate plan’s benefits.l (I will italicize parts of it in case you want to skim it.)
“If you ask most folks what estate planning is, they might say it’s a way to save a lot of money on taxes and expenses when someone dies. And that’s true. They might add that estate planning makes it quicker and easier to settle the matter of who gets what. Sure, it can do all that and more, but those answers don’t get to the essence of what estate planning is all about.
“To contemplate one’s own death, or the death of loved ones, isn’t easy but it’s essential, and we make sure our clients have given due consideration to what will become of their estate. Who will take the reins? At some point in that conversation, clients begin telling us about their children and grandchildren and what they are pursuing in life, for better or for worse. They are so proud of them, or so worried, or so disappointed. ‘It looks like our Sally is going places!’ one couple might say. Another might lament that their Tommy seems lost in a fog of addictions.
“And that’s when they begin to tap into the true purpose of estate planning. It’s about passing on not only possessions and valuables but also one’s values. It’s natural to want your children and grandchildren to use an inheritance in a way that will uphold the principles that you tried to instill in them.
“Your legacy is not as simple as a plaque on a wall or your name on a wing of the museum. Your legacy will be measured instead by how well you protected the members of your family so they can continue to do meaningful things in the world. To do that right, you must prepare. You must get the pieces in place. That’s what estate planning does. It protects your family both financially and emotionally. It can forestall the lengthy, grueling, expensive, and public process that otherwise could ensue. It brings clarity to your heirs about your final wishes.
“Nobody wants to think it will happen in their family, but ugly legal fights are not uncommon after a family member passes. The clarity of a well-designed estate plan helps to dispel any hard feelings that might not split a family apart but could lead to years of lingering tensions. That strife may be rooted in money, in principle, or in sentiment.
“For all the good it can do, money can be divisive. Some relatives may feel they deserve more of an inheritance than they are getting. What feels fair to one person is a farce to another. Celebrity estate battles are a staple in the news, as people crawl out of the woodwork to claim a share. Often, though, the disputes are less about money and more about principle. For example, why was the family business left to all the siblings when only one of them had anything to do with it? Or why did one sibling get money while another inherited a house, along with the maintenance costs and the hassle of selling it?
“And very often, the hard feelings arise from sentimental jealousies. [‘Who Gets Grandma’s Yellow Pie Plate?’] by Marlene S. Stum is a workbook and program that is well known in the world of estate planning. In her family, she wrote, the pie plate holds a lot of special memories: ‘It belonged to my great-grandmother, who spent a lot of time in the kitchen with her daughters.’ The plate might not bring a dollar at a yard sale, yet it came to represent priceless years of love and laughter. So which sister gets the honor of baking up more memories? Decisions like that are tough, and most families can empathize. Maybe it’s a baseball glove, or a stamp collection, or Grandpa’s fishing pole. Anything dear to the heart can become a source of hurt, and such matters must be handled with delicacy.
“As you can see, estate planning doesn’t just save on taxes. It can save families.”
The trend of the financial advisory industry is to add value beyond investment selection, at the expense of profit margin. I applaud my colleagues for being part of that movement. The Department of Labor’s proposal, if enacted, would help bring the rest of the industry into the modern age and, ultimately, make them more competitive. It’s a win-win for the industry and for clients.
Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.