Fidelity investments wrote their own little investment card. Guess what is missing?

Fidelity Investments today tweeted “6 steps to pay off #debt while saving money at the same time.”


These are pretty good rules, nicely presented. Indeed they remind me of something I first posted here at Samefacts:


That index card is probably my most famous contribution to American financial journalism. It was featured all over the place, and has been copied, plagiarized, modified, even translated into Romanian.

Somehow, Fidelity omitted a few items. Consider these two…

Pay attention to fees. Avoid actively managed funds.
Make your financial advisor commit to a fiduciary standard.

These are important. Every year, millions of Americans trying to save for retirement lose billions of dollars because they are sold overly-costly or inappropriate investments.

I happened to be on a conference call today hosted by experts from the White House Council of Economic Advisors who were discussing this very issue. Their report, The effects of conflict advice on retirement savings, contained no new findings. Instead it summarized what is now widely-known among researchers and investment professionals. Among other nuggets in a long and depressing report:

Savers receiving conflicted advice earn returns roughly 1 percentage point lower each year (for example, conflicted advice reduces what would be a 6 percent return to a 5 percent return)….

A retiree who receives conflicted advice when rolling over a 401(k) balance to an IRA at retirement will lose an estimated 12 percent of the value of his or her savings if drawn down over 30 years. If a retiree receiving conflicted advice takes withdrawals at the rate possible absent conflicted advice, his or her savings would run out more than 5 years earlier.

The most common self-interested advice is to recommend actively-managed mutual funds, which badly under-perform much less expensive index funds.

Much of today’s call concerned conflicts of interest that arise when people roll over their 401(k) accounts. Every year, workers roll over hundreds of billions of dollars from their workplace 401(k) accounts to individual retirement accounts. Many people roll over their 401(k) in response to a barrage of television accounts arguing—often incorrectly—that this is a smart financial move. Many people are also following specific advice offered by a financial professional.

Although many investors believe that they are receiving unbiased advice, the financial professional typically makes much more money if she can convince her client to roll over his 401(k). This conflict of interest is often concealed or incompletely disclosed, with predictable results. Much of the time, people are persuaded to roll-over their 401(k)s into overly-costly investments that are poor bargains. Rollover IRAs are often markedly worse investments than investors’ original 401(k)s.

To curb such abuses, the Department of Labor has sought to promulgate a rule requiring investment professionals to follow a “fiduciary standard,” whereby advisors are legally obligated to maximize their client’s best financial interests. The industry has bitterly fought these regulations, and has fought requirements that advisors transparently disclose the compensation they receive that may influence their advice.

Mr. Ronald O’Hanley, Fidelity’s president of asset management and corporate services, happened to be one such opponent of these rules. As O’Hanley put things, providing these basic protections against conflict of interest would

dramatically curtail the valuable education and guidance investors receive today. The real outcome of this misguided proposal would be no education and no guidance for average and low-income Americans. They are the ones that are going to get hit most by this.

“Average and low-income Americans” who interact with Fidelity Brokerage Services do not enjoy fiduciary protections. Instead, their transactions are governed by the more lax “suitability” standard. “Suitability” sounds pretty impressive to the average person with a life and a day job. This actually allows the firm much greater latitude to advance its own interests even if this is not the best deal for their client.

To learn more, you might read the below gobbly-gook I found from Fidelity. All the bolding is in the original document:

When we act as a broker for you, we also offer you investment education, research, planning assistance, and guidance designed to assist you in making decisions on the various products that you may wish to hold. No separate fees are charged for the investment education, research, planning assistance, and guidance that Fidelity offers you because they are part of, and considered to be incidental to, the brokerage services that we provide. Unless we specifically state otherwise, Fidelity is acting as a broker-dealer with respect to your account and as a broker-dealer and insurance agent with respect to any insurance product.
[…]
When we act in a brokerage or insurance agency capacity, we do not have a fiduciary or advisory relationship with you and our disclosure obligations are more limited than if we did. In general, unless we specifically inform you otherwise, the services offered by our representatives are services offered by FBS.

Get that? FBS is not in an “advisory relationship” with you, even though it is offering “investment education, research, planning assistance, and guidance.”

This is so complicated that the lesson is simple. Don’t deal with anyone under these terms. Fidelity should add this to their index card.

PS: You may wonder what you’re missing. The same Fidelity document gets interesting a few paragraphs down (reproduced below). That’s what you’re not getting.

If you are an investment advisory client, we owe you a fiduciary duty under the Advisers Act in connection with the specific investment advisory service we will be providing to you. An example of this duty is our obligation as an investment adviser to make full and fair disclosure of all material facts about our services and our relationship and an obligation to place your interests before our own when managing your account.
In an advisory relationship, we also are obligated:
• To ensure that investment advisory services are suited to your specific investment objectives, needs, and circumstances;
• To disclose potential conflicts of interest between our interests and yours;
• To disclose whether and to what extent we (or our affiliates) receive additional compensation from you or a third party as a result of our relationship with you;
• To get your consent before engaging in transactions with you for our own, an affiliate’s, or another client’s account; and
• To not unfairly advantage one advisory client to the disadvantage of another.

That actually sounds pretty pretty good.

Author: Harold Pollack

Harold Pollack is Helen Ross Professor of Social Service Administration at the University of Chicago. He has served on three expert committees of the National Academies of Science. His recent research appears in such journals as Addiction, Journal of the American Medical Association, and American Journal of Public Health. He writes regularly on HIV prevention, crime and drug policy, health reform, and disability policy for American Prospect, tnr.com, and other news outlets. His essay, "Lessons from an Emergency Room Nightmare" was selected for the collection The Best American Medical Writing, 2009. He recently participated, with zero critical acclaim, in the University of Chicago's annual Latke-Hamentaschen debate.

4 thoughts on “Fidelity investments wrote their own little investment card. Guess what is missing?”

  1. Rollover IRAs are often markedly worse investments than investors’ original 401(k)s.

    I don't understand why this is necessarily true. I agree with you that many financial advisors offer bad or self-serving advice. I'm just asking whether there is something inherently unwise about such a rollover, assuming there is no bad investment advice involved.

    I guess I'd add one item to these lists as well. Don't keep your 401(k) in the stock of your employer.

    1. I would guess that it's not *necessarily* true as some kind of logical consequence. But a 401(k) manager typically does have a fiduciary duty to the fund, while the "financial advisor" telling people where to invest the rollover has a fiduciary duty to their employer, who might just happen to offer a bunch of investment instruments. In addition, when it comes to administrative fees, the 401(k) manager(s) are negotiating with a company that can afford to spend time on negotiations and market research, and losing an account because the client is dissatisfied could have a material effect on result. The "advisor" selling IRA instruments, not so much.

      (Even assuming that an accountholder has the resources to find a good advisor, carving out the time to do it during the rollover window may not be the best use of their available hours.)

      1. My impression is that 401(k)'s can be, and generally are, allocated to specific investments by the beneficiary, as IRA's are. A 401(k) manager handles administration and may – usually does – limit the investment choices, but there is still plenty of latitude. If you can choose a set of Vanguard funds, for example, that's enough.

        What's critical is the advice you get, of course. One of the big problems we have, in general, with retirement policy is the general lack of financial knowledge. That makes it a ripe area for all sorts of con artists, not to mention well-intentioned idiots with a gift for marketing themselves.

        Harold's index card really does tell you about 95% of what you need to know.

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