GuidePost - Vol. 2, Issue 3 2006

The GRABot BAG
by Sherrie E. Grabot, CEO

April 2006
April showers – and some more rain on the advice parade

Here we go again.

Nearly ten years after the Department of Labor granted the first prohibited transaction exception (PTE) allowing an investment firm to provide objective investment advice to retirement plan participants, variations on the same old argument are still popping up: ‘Isn’t that like the fox guarding the henhouse?’

It’s always a good question to ask. But the answer this time is emphatically “No.”

The latest round stems from a recent MarketWatch article by Thomas Kostingen, titled “Not all advice created equal: Retirement savers need help, but fund companies have conflicts.” Mr. Kostigen is a tireless watchdog on corporate ethics, but in this case I must disagree.

Squalls again in Congress
The debate centers around the Pension Protection Act (H.R. 2830), the latest evolution in a series of bills sponsored by Rep. John Boehner, R-Ohio. The legislation would expand providers’ ability to offer objective, professional investment advice, subject to “tough fiduciary and disclosure safeguards.” Kostigen agrees completely with the sponsors’ arguments – don’t we all? – that participants do a poor job of investing for themselves, and that they desperately need help. But he feels that “proffering ‘any advice is better than no advice’ corrupts the pension system even more.”

Now, if fund companies were allowed to give direct advice, I’d be worried about conflicts of interest too. We’d like to think that an industry we trust to manage trillions of dollars honestly might also succeed in giving advice, at least within some sort of limited and well-defined parameters. But realistically the temptation to steer money into fee-laden funds would probably be too great.

Third-party providers are another matter entirely. I take exception to the idea that “Even if mutual fund company-provided advisers try to give objective advice, the products they best know, and therefore will naturally push, will be the ones related to the complex they work for.” And it’s not from a sense of professional pride, but just plain common sense.

Long range forecasts
Retirement investing is all about asset allocation. In the long run it’s the balance of asset classes that matter, and to some extent the subclasses as well at the level of the “style box:” value, growth, or in-between; small, medium, or large. On a timescale of a decade or two, comparing the finer points of the Acme Overseas Explorer Fund and the Ace International Prospector Fund simply is not part of the retirement equation.

GuidedSavings is designed to operate independently of brand in the investments it considers. Whatever is available within a given plan, we can work with it. We’re efficient, but we’re by no means unique in this capability. That’s because any fund breaks down into fairly a standard collection of numbers. Our system does the math just like any other professional financial planner (human or otherwise). A human financial planner, in a blue-sky situation, might inadvertently “always go back to what you know best,” namely their own product line. But machines don’t play favorites. And when K plans are stacked with funds from one provider anyway, there’s little scope for either bias or blue-sky objectivity.

You don’t need a weatherman…
To paraphrase Bob Dylan, you don’t need a certified financial planner to know how to pick an index fund. Not surprisingly that’s who you’ll find opposing the bill, and quoted by Kostigen: The Financial Planning Association (no, Bob hasn’t expressed an opinion). They have very legitimate reasons to be concerned about losing potential business to fund providers. But the vast majority of plan participants will never enjoy their services. And think about this: if choosing funds from a menu really did require a financial planner with personal knowledge of specific funds, how could everyday participants ever hope to succeed?

Which is the whole point. To help them succeed, it’s not enough to conclude “Therefore the emphasis should be on quality education – with no participant left behind.” As I’ve said before, education doesn’t work, at least not in the traditional sense of newsletters and do-it-yourself worksheets. Realistically, many participants will never make adequate decisions about their retirement savings without some kind of help.

We owe it to them to provide that help. All the concern in the world about “protecting the retirement savings of plan participants” is not meaningful if they have little or no savings to protect.

~~ Sherrie