Fidelity Investments today tweeted “6 steps to pay off #debt while saving money at the same time.”



6 steps to pay off #debt while saving money at the same time: http://t.co/xPBib6loz5 #ASW2015 pic.twitter.com/oTcTYTPIWW

— Fidelity Investments (@Fidelity) February 23, 2015

These are pretty good rules, nicely presented. Indeed they remind me of something I first posted here at Samefacts:



Want financial advice? 2) @haroldpollack gives it free...in index card form. pic.twitter.com/FxZURVw5z6

— Sendhil Mullainathan (@m_sendhil) September 5, 2013

That index card is probably my most famous contribution to American financial journalism. It was featured all over the place, and has been copied, plagiarized, modified, even translated into Romanian.

Somehow, Fidelity omitted a few items. Consider these two…

Pay attention to fees. Avoid actively managed funds.
Make your financial advisor commit to a fiduciary standard.

These are important. Every year, millions of Americans trying to save for retirement lose billions of dollars because they are sold overly-costly or inappropriate investments.

I happened to be on a conference call today hosted by experts from the White House Council of Economic Advisors who were discussing this very issue. Their report, The effects of conflict advice on retirement savings, contained no new findings. Instead it summarized what is now widely-known among researchers and investment professionals. Among other nuggets in a long and depressing report:

Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return)….

A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.

The most common self-interested advice is to recommend actively-managed mutual funds, which badly under-perform much less expensive index funds.

Much of today’s call concerned conflicts of interest that arise when people roll over their 401(k) accounts. Every year, workers roll over hundreds of billions of dollars from their workplace 401(k) accounts to individual retirement accounts. Many people roll over their 401(k) in response to a barrage of television accounts arguing—often incorrectly—that this is a smart financial move. Many people are also following specific advice offered by a financial professional.

Although many investors believe that they are receiving unbiased advice, the financial professional typically makes much more money if she can convince her client to roll over his 401(k). This conflict of interest is often concealed or incompletely disclosed, with predictable results. Much of the time, people are persuaded to roll-over their 401(k)s into overly-costly investments that are poor bargains. Rollover IRAs are often markedly worse investments than investors’ original 401(k)s.

To curb such abuses, the Department of Labor has sought to promulgate a rule requiring investment professionals to follow a “fiduciary standard,” whereby advisors are legally obligated to maximize their client’s best financial interests. The industry has bitterly fought these regulations, and has fought requirements that advisors transparently disclose the compensation they receive that may influence their advice.

Mr. Ronald O’Hanley, Fidelity’s president of asset management and corporate services, happened to be one such opponent of these rules. As O’Hanley put things, providing these basic protections against conflict of interest would

dramatically curtail the valuable education and guidance investors receive today. The real outcome of this misguided proposal would be no education and no guidance for average and low-income Americans. They are the ones that are going to get hit most by this.

“Average and low-income Americans” who interact with Fidelity Brokerage Services do not enjoy fiduciary protections. Instead, their transactions are governed by the more lax “suitability” standard. “Suitability” sounds pretty impressive to the average person with a life and a day job. This actually allows the firm much greater latitude to advance its own interests even if this is not the best deal for their client.

To learn more, you might read the below gobbly-gook I found from Fidelity. All the bolding is in the original document:

When we act as a broker for you, we also offer you investment education, research, planning assistance, and guidance designed to assist you in making decisions on the various products that you may wish to hold. No separate fees are charged for the investment education, research, planning assistance, and guidance that Fidelity offers you because they are part of, and considered to be incidental to, the brokerage services that we provide. Unless we specifically state otherwise, Fidelity is acting as a broker-dealer with respect to your account and as a broker-dealer and insurance agent with respect to any insurance product.
[...]
When we act in a brokerage or insurance agency capacity, we do not have a fiduciary or advisory relationship with you and our disclosure obligations are more limited than if we did. In general, unless we specifically inform you otherwise, the services offered by our representatives are services offered by FBS.

Get that? FBS is not in an “advisory relationship” with you, even though it is offering “investment education, research, planning assistance, and guidance.”

This is so complicated that the lesson is simple. Don’t deal with anyone under these terms. Fidelity should add this to their index card.

PS: You may wonder what you’re missing. The same Fidelity document gets interesting a few paragraphs down (reproduced below). That’s what you’re not getting.

If you are an investment advisory client, we owe you a fiduciary duty under the Advisers Act in connection with the specific investment advisory service we will be providing to you. An example of this duty is our obligation as an investment adviser to make full and fair disclosure of all material facts about our services and our relationship and an obligation to place your interests before our own when managing your account.
In an advisory relationship, we also are obligated:
• To ensure that investment advisory services are suited to your specific investment objectives, needs, and circumstances;
• To disclose potential conflicts of interest between our interests and yours;
• To disclose whether and to what extent we (or our affiliates) receive additional compensation from you or a third party as a result of our relationship with you;
• To get your consent before engaging in transactions with you for our own, an affiliate’s, or another client’s account; and
• To not unfairly advantage one advisory client to the disadvantage of another.

That actually sounds pretty pretty good.