The Investment Company Institute Again Betrays Individual Investors

Sen. Elizabeth Warren

The leading trade association of the $16 trillion in assets (as of year-end 2014) mutual fund industry has again shown its distain for individual mutual fund shareholders.

Paul Schott Stevens, ICI president
Paul Schott Stevens, ICI president

In a recent letter to Congressional committee, the president of the Investment Company Institute (ICI), the mutual fund industry’s leading lobbying group, went on record last week as opposing the Department of Labor’s pro-investor disclosure rules that basically would force financial sales people to work in the best interests of their own clients.

Now, in most other professions, such as medicine, the law, and even the food services industry, this position is a no-brainer.  It is a given that a doctor would prescribe the most appropriate therapy for an illness since the doctor’s credo of “do no harm” should be observed at all times.  Lawyers also have a professional obligation to provide the best defense possible for their clients.  Malpractice lawyers are available in both industries to keep errant professionals in check and recover damages for the aggrieved.

But the financial services industry is different.  It is a sales profession. Selling dominates success and determines careers.  So given the opportunity, some financial professionals (and no one knows how many) do bad things against their unsuspecting clients by selling them inappropriate, expensive mutual funds, annuities, or other investments, such as limited partnerships or leveraged products.

In short, they can often violate their fiduciary duty, which is embedded in many other professionals that deal with money, such as estate and probate lawyers, bankers, accountants, and trustees.

Focusing on Commissions and Fees

Instead, the commission-based investment sales industry gives financial sales people broad authority to sell whatever meets basic client needs, regardless of whether another better or cheaper alternative is available. There are no established or enforced rules that simply state an advisor has to sell a mutual fund with the lowest expense ratio and fees in a fund sector given similar performance and risk data over time and different market cycles.

Worse, in addition to commissions, there is a thicket of hidden 12b-1, management, redemption fees, revenue sharing deals, loads, charges, and fund operating expense considerations that all can reduce an investor’s net return.

Mutual fund fees are critical for a few reasons:  They affect net returns and they are one of the few variables investors can control.

How bad is the impact of mutual fund fees on an investor’s return?  In one DOL example available in “How 401(k) Fees Destroy Wealth,” a 1% difference in fees over 35 years with an account balance of $25,000 could reduce an account balance by 28% over the period. 

There are numerous stories about the acidic impact of fees on investor returns. The most recent appeared on CNBC  Nov. 5, 2015 and quoted from a Morningstar analysis  that found higher-cost funds “are more likely to underperform and ultimately go under than lower-cost funds.”  Academic studies focusing on fees and expenses going back over a decade have found similar results.

Of special interest is the annuities industry which has reputation as being  the Wild West of fees and unscrupulous practices.  In an October 2015 report, “Villas, Castles and Vacations,” Senator Elizabeth Warren (D-Mass.) said annuity

Sen. Elizabeth Warren
Sen. Elizabeth Warren

salespeople are receiving kickbacks from annuity sales firms for selling their products over competitors. The kickbacks include free meals, hotel stays, vacations to expensive resorts, gift cards, golf outings and all-expense-paid trips.

And this presents major problems for making full disclosure to clients in the financial sales industry, especially for those who sell annuities and actively-managed, load mutual funds.

Client disclosure is such a serious problem that the investment industry has mounted a major lobbying campaign for the last decade to prevent the adoption of any fiduciary standard that would put the needs of clients ahead of their financial salesperson.

And that is why the head of the ICI, Paul Schott Stevens, and others in the commissioned-based financial industry want to derail the DOL’s thoughtful, industry-reviewed rule that would force financial salespeople to explain fees, expenses, pros and cons of various financial products to their often less sophisticated clients.

In his letter, Stevens (who makes $1.797 million annually as ICI president) said that if the DOL’s proposed rules were adopted in their current form, “it would do great harm.”

Instead, Stevens and other lobbying groups representing financial industry salespeople, said a bill passed by Republicans in the House (H.R. 1090) would push the SEC and the DOL to develop “a harmonized fiduciary duty for all investors.” He did not elaborate on what the harmony would sound like, especially since these discussions have been going on for about a decade. In related testimony presented Sept. 30, 2015, Stevens also challenged the DOL’s data that showed high fees and expenses unnecessarily cost investors $17 billion annually.

He then repeated the financial lobbyists’ unsupported mantra that the proposed shift from shifting most small investors (those with portfolios under $100,000) from commission-based advice to fee-based accounts would be a costly expense for investors. The ICI is a great source of industry data and Stevens said the proposed DOL rules would affect 65% of households with IRAs valued at less than $100,000. This would cover some 22 million households.

“Taking these two factors together, we submit that far from helping savers, the rule would increase fees and reduce returns, resulting in $109 billion in net increased costs to American workers over 10 years,” he said.

Why would investors pay these increased costs? Because financial salespeople would see a loss in income (due to a drop in sales) and lost commissions because they would have to sell products that were more suitable, and often less expensive, for clients. To fill this financial void, lobbyists are asking investors to compensate financial salespeople for their lost commissions. Stevens did not say what would account for the lower portfolio returns, but industry professionals have long said that a decline in fees produces a higher net return for investors.

The cost of mutual fund fees over time.
The cost of mutual fund fees over time.
















The DOL’s well-publicized and widely discussed rule proposal is to implement a fiduciary standard that gives uninformed investors objective information.  How this straightforward proposal would prevent investors with less money from getting personalized, cost-effect investment advice has not been fully explained. Maybe it is because commission-based advisors don’t want to spend time with people who have small portfolios, unless they are compensated by selling  higher commission, often ill-suited products. That seems plausible, but it cannot be said publicly.

In a reversal of the facts, Stevens said the Republican House bill to eliminate the pro-investor fiduciary standard would really be the financial sales industry’s way “to get the fiduciary rules right.” But “right” for who: investors or the investment industry?

Conflicted Lobbyists

The problem with conflicted, often self-serving industry lobbyists, like the ICI, is that they always present their positions from their respective industry’s perspective.  The ICI is in a politically difficult position since they are paid by the industry, but have to publicly support industry customers. The problem is they cannot simultaneously serve two masters. As a result, no one speaks forcefully for individual investors.

If the ICI had any long-term vision, they would address the nation’s looming retirement crisis, including problems in the 401(k) sector.  A recent Bloomberg News report  by Carol Hymowitz found that half of U.S. workers lacked company-sponsored retirement plans, while 45% of businesses with fewer than 100 employees offer 401(k)s. This is a much larger national problem and one which should concern any industry group which has a long-term vision for their overall constituency.  But the ICI’s position on this issue shows it is more concerned about protecting the commissions of financial salespeople.

Giving objective advice to investors should not produce a corresponding increase in costs to investors.  They should have been getting objective advice in the first place.

Now, the lobbyists are asking investors to compensate financial salespeople for lost commission-based income that happened when they were sold less-then-optimal products in the first place.

Lobbyists like to blame the victim, but in this case, the financial industry is also asking the victims (individual investors) to compensate their offenders (commission-based salespeople) and that is not a burden for individual investors to assume.


Lobbyists Who Work Against Individual Investors

Securities Industry and Financial Markets Association (SIFMA)

The American Bankers Association (ABA)

American Council of Life Insurers (ACLI)

American Retirement Association for Advanced Life Underwriting (AALU)

Bond Dealers of America (BDA)

Financial Services Institute (FSI),

Financial Services Roundtable (FSR)

Investment Company Institute (ICI)

Investment Program Association (IPA)

Insured Retirement Institute (IRI)

National Association for Fixed Income Annuities (NAFA)

National Association of Insurance and Financial Advisors (NAIFA)

The National Association of Real Estate Investment Trusts (NAREIT)

The Real Estate Roundtable

The U.S. Chamber of Commerce





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