Personal finance issues show up much the same across the world
• The fiduciary rule is designed to protect investors from brokers who push high-fee products
Of all forms of financial journalism, covering personal finance is considered the most localised. Even though the Financial Times is now a global publication, its personal finance section is carried only in the UK domestic edition. Yet its fund management supplement, with its focus on institutions, is carried internationally.
There are good reasons to see personal finance reporting as a highly parochial endeavour. There are obvious factors such as the differences in tax regime, the ways in which brokers get paid and the legal framework. But the issues are converging around the world.
For a start, we are all equally fed up with those commercials for insurance companies (as well as dentures) that feature beaming pensioners either on the beach or sailing a yacht. Even in the US, for all its wealth, that’s a pipe dream for most.
Here in SA, we have even named our Retail Distribution Review after a similar exercise in the UK.
In the US, they are going through much the same change with what they call the fiduciary rule, designed to ensure that brokers put their clients’ interests first. For now, it applies only to retirement products such as the 401(k) plans, but it is hard to see a high-cost discretionary investment industry sitting side by side with a value-for-money retirement industry for too long. Clients won’t tolerate higher fees for comparable discretionary investments.
We have quite an advanced financial services industry here. One rule that has protected retirement savers is regulation 28 of the Pensions Fund Act. It prevents people from investing their savings in a single share, as the unfortunate employees of Enron had done before its collapse. Many Americans lost 50% to 75% of their retirement savings in the global financial crisis as it was poorly invested.
As with Retail Distribution Review, we hear that small investors won’t get adequate advice under the US fiduciary rule — without lavish upfront commissions it won’t be worth their while. But many brokerages and insurance agents have promised to serve and provide best-interest advice. As with Retail Distribution Review, the fiduciary rule is considered to be an excellent reason to talk to the broker about advice received and ask to be switched to lowercost options, though switching costs are still a factor.
Cost isn’t the only consideration: brokers have to look at the investor’s risk profile, liquidity requirements (need for funds), the performance history of the investment and compatibility with the investor’s goals. So nothing with which our Financial Services Board or the UK’s Financial Conduct Authority would disagree.
So this is hardly a specifically American issue. The principles of financial education apply throughout the world.
A lot has been recently written on the topic, as July is savings month. I looked through the international press to see if views expressed in personal finance columns in the US are different from ours. Variations on that well-worn Old Mutual slogan “how much is enough?” keep on appearing.
I would advise anyone interested in the topic to read Michelle Singletary of the Washington Post, who has a retirement column on Mondays and a more general personal finance column on Thursdays. She is down to earth and avoids the pomposity that can make The Washington Post or New York Times difficult reads. One of her best recent columns highlighted how even the wealthy can blow their capital.
A lawsuit is on between Pirates of the Caribbean movie star Johnny Depp and his business managers, who have the highly creative name of The Management Group. There is $25m at stake. Depp had earned $75m for just three films: The Tourist, Pirates of the Caribbean: On Stranger Tides, and Dark Shadows. Some estimate that he has made $650m in his career. Yet with his lavish spending — $2m a month on average — he ended up with a $4m overdraft.
Alyssa Milano, best known for Charmed and Who’s the Boss, is the latest Hollywood celebrity to be involved in a case against her financial manager, accountant Kenneth Hellie. This case, though, seems to have more merit. Hellie oversaw home improvement at her $3m house, which cost $5m, and he invested her into high-risk investments that would not have been considered best-interest advice on any planet.
Megastars such as Rihanna and Elton John have also had high-profile legal battles with their managers. Maybe it is hard to feel sorry for the superrich, even if their managers have acted dishonestly, but there is a lot of bad advice out there.
Terri Smith of Whitefish, Montana, wrote to the Post that after she and her husband retired from the federal government their adviser told then to move their savings from the Thrift Savings Plan — a low-cost defined contribution fund for civil servants — into a high-cost individual retirement account with expensive mutual funds as the underlying investment. Because she didn’t ask she didn’t realise that some of these funds had a fee of 1.5% a year.
Once she knew the full picture of the high fees she left the adviser and started working directly with Charles Schwab, a powerful institution in the US with no real equivalent in SA. It provides direct access to lowfee options without the one size fits all of a Vanguard in the US, or of 10X locally.
With hindsight, Smith says she should have remained in the Thrift Savings Plan — it is safe with low fees and it has a cash fund with the best interest rates of any fund in America.
David Kaune of Pennsylvania wrote to Singletary that he had worked most of his life on asset management IT systems and that the fiduciary rule was long overdue as too many advisers primarily consider getting their piece of the pie by pushing highfee products. In his experience, the same investment performance could have been achieved and often exceeded with a lower-fee product.
EVEN THE WEALTHY CAN BLOW THEIR CAPITAL … THERE IS A LOT OF BAD ADVICE OUT THERE