Individual investors may want to add one more resolution to their lists for 2019: Watch their backs.
More than a decade after the financial crisis, individual investors are still viewed as the best guardians of their own personal financial security.
The aftermath of the crisis prompted new efforts to boost protections for individuals, with many of those rules stemming from provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
That law helped to create the Consumer Financial Protection Bureau, a consumer watchdog agency. It also gave the Securities and Exchange Commission the authority to establish regulations for a uniform fiduciary standard that would protect retail investors.
Yet even as a new director of the CFPB, Kathy Kraninger, was confirmed last month, some consumer advocates are worried about that agency’s future.
And efforts to create a fiduciary-type rule — which were formally scrapped by the Labor Department last year and now lie in the hands of the SEC — will take time to come to fruition.
Kraninger’s confirmation to lead the CFPB drew criticism from consumer advocacy organizations, largely because of her lack of experience.
She most recently worked at the Office of Management and Budget and has held positions at the departments of Transportation and Homeland Security, among others, but has never worked in consumer protection or financial services. That’s an issue for organizations such as the National Association of Consumer Advocates, a group comprised of lawyers who help people victimized by predatory businesses.
The CFPB did not respond to a request for an interview with Kraninger or for comment.
“If a bank cheats you, if a credit card charges you too much in fees, if you are being defrauded, it is less likely you are going to get help from the CFPB.”
While a number of experienced staffers remain at the CFPB, its ability to advocate for individuals will likely diminish under the current leadership, said Ira Rheingold, executive director at the National Association of Consumer Advocates.
“For consumers, they need to be more wary,” Rheingold said. “If a bank cheats you, if a credit card charges you too much in fees, if you are being defrauded, it is less likely you are going to get help from the CFPB.”
Some congressional Republicans have called for abolishing the agency altogether.
Rheingold points to the CFPB’s Consumer Complaint Database as evidence of weakening protections.
The database aggregates consumers’ grievances with financial companies. Until October 2017, the CFPB was publishing monthly complaint reports from the database. But that has since stopped, and the CFPB said in a notice last year that it may take the database down from public view.
For consumers, the goal of submitting a complaint would be to have the CFPB help resolve the issue.
“I think it is much less likely that the CFPB will intervene or mediate in a way that effectively helps consumers,” Rheingold said.
Kraninger did not address the database issue in a Dec. 11 press conference, according to a transcript of that meeting. But she did say the agency plans to pursue enforcement actions when it is considered appropriate.
“Where there are bad actors, we absolutely will take the enforcement actions to the full extent of the law and make sure that we are protecting consumers,” Kraninger said.
Last week, the CFPB brought a $15.5 million enforcement actionagainst USAA Federal Savings Bank, its first under Kraninger’s leadership.
What to do if you have an issue
Consumers should still file their complaints to the CFPB to make them a matter of public record.
“If they’ve got a dispute, it’s always a good thing to include it,” Rheingold said.
At the same time, individuals who feel they have been wronged can also go to another source: their state attorneys general, who are known for vigorously defending the law and going after bad actors, according to Rheingold.
“The CFPB is more likely to pull their punches, to not bring an action,” Rheingold said. “AGs are looking to fill that void.”
One of the goals following the financial crisis has been to implement a uniform fiduciary standard for investors.
That is essentially fancy language for requiring financial professionals to provide advice in their clients’ best interests. Currently, all registered investment advisors are required to act as fiduciaries. Brokers-dealers follow another rule, known as the suitability standard, which is considered less rigorous. That means that as long as the investment is appropriate for you, they can recommend it.
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But investments that are just suitable can be much more expensive for the investor, said Patti Houlihan, president and CEO of Houlihan Financial Resource Group and a member of the Committee for the Fiduciary Standard.
For example, you could have a choice between two similar funds, and one could have a much larger expense ratio, or costs associated with running the fund, compared with the other investment.
A financial professional following the suitability standard could put you in the more costly fund. If they were adhering to the fiduciary standard, they would not, Houlihan said.
But coming up with one fiduciary standard for the industry has been slow. The SEC first published a study on the subject in January 2011.
Though the SEC was authorized to propose a rule, the Labor Department pushed ahead with its own version that would have applied solely to retirement accounts. That regulation, however, was scrapped last year.
Now, the SEC is pushing ahead with a new proposed rule called Regulation Best Interest. The proposal has drawn mixed reviews.
The Securities Industry and Financial Markets Association, an industry trade group, has praised the proposed rule for being more expansive than the Labor Department’s regulation.
The Committee for the Fiduciary Standard, on the other hand, still sees holes in the protections it would provide for investors. Most notably, the group argues, it would fall short of a full fiduciary standard.
“Duty of loyalty, duty of care, to put the client’s best interest first, that is fiduciary,” Houlihan said. “When you start coming out with a regulation that sounds like that, but isn’t, it’s the worst thing for the consumer that you can do.”
While the SEC works to come up with a final rule, consumers must still navigate an investment world with two competing standards.
SIFMA, for its part, is optimistic that the SEC’s proposed rule could come to fruition in 2019.
What investors need to do
Consumers who are working with financial professionals need to address the fiduciary issue by having a direct conversation.
Ask your financial advisor or other professional directly whether they are a fiduciary, Houlihan said. You can also take it one step further by asking them to sign an oath that the Committee for the Fiduciary Standard has drawn up.
“If they don’t have it in place, they will not sign it and you’ll know,” Houlihan said.
Remember: Just because someone says they are a fiduciary does not necessarily mean that it is true.
Trust your instincts about the professional with whom you are working and the advice they recommend.