Subject: IA-BD-Conduct-Standards
From: David Bach

June 12, 2017


The Investment Adviser's Act of 1940 pretty well covers investment advisers.

One problem the SEC has is that financial instruments are not bought and sold just by broker-dealers (BDs). Mutual funds (the SEC monitors), banks (not monitored), insurance companies (monitored by states), financial planners (?), and the new kids on the block, robo-advisers (?), trade financial instruments for retail customers (RCs) also. The Department of Labor's (DOLs) Fiduciary Rule (FR) is broader based than anything the SEC can come up with to level the playing field for RCs. The DOLs FR covers retirement accounts, regardless of who is trading investment instruments for those accounts. And will the DOLs FR ever apply to regular accounts instead of just retirement accounts.?

Another basic problem is financial literacy of RCs. I've been in the investment business for 42 years, with 31 of them at a large public pension fund. My colleagues and I spoke investment jargon and we knew what it meant. I retired and started volunteering in the community. I was shocked at the lack of knowledge of the ordinary investor "out there." Some didn't even want to talk about investments (I've read where some people would prefer to talk about death rather than investments). Some people where I volunteer didn't know the last time they looked at their deferred compensation (DC) plan statement, much less know which mutual funds they had invested in. Some felt comfortable going into retirement with $140,000 in the DC. I write a bi-weekly investment article in the internal newsletter to help them invest in their DC plan. The former DC manager (they changed January 1) double-billed participants on target-date funds (TDFs). Add in a optional management fee to manage the DC assets for the investor, and the manager's fees rose to 1.7%. If an account earned 2% for the year, the highest fee possible would be 85% of the total return. I told DC participants several times in the newsletter to be aware of this.

I did a little checking into why RCs are so financially illiterate. Here are some results:

I have run into three millennials in the last few years that have never heard of the phrase "compound interest." The entrance exam at our local four-year college indicated that 96% of entrants from one local high school needed to take a remedial math course. All incoming freshman are taught how to write a check in their orientation class.

Once we solve the education problem, a lot of the other financial/investment problems will go away. Information is power, but knowledge is power squared.

Thank you,
David Bach