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Wednesday, March 11, 2015

Managed retirement funds and IRAs require financial responsibility

Source: US-PDGov

The above graph indicates an increase in individual retirement account assets from approximately 1-%-2% in the late 1970s to around 28%  by 2013. Of these assets, $94 billion was managed directly by consumers in 2011 per a North American Securities Administration Association report. What this means is that those individuals taking their money management in to their own hands are increasingly dependent on their own decision in addition to the rest of retirement investors being reliant on the financial powers that be. There are obstacles in both these mine fields, the first of which is fiduciary standards and the second of which is individual judgment.

Fiduciary standards

A problem with managed money or investment advice is that fiduciary standards do not always apply, and consumers do not always know that. In other words, when it comes to financing advice, when the financial professional giving that advice is not subject to specific regulations preventing conflict of interest from creating a hierarchy of priorities, then investors are at risk of losing money or not gaining as much. Some may even state such financial advice is not professional at all. This is evident in  a federal report titled, "The effects of conflicted advice on retirement savings". It states the following:

So if the above is true, what choice do Americans have when it comes to professional financial advice? One option is to only seek council from financial professionals licensed to give financial advice. However, even licensed financial advisors may only be subject to "suitability standards", which mean that the person giving the advice must believe that advice being given should be appropriate for clients' stated investment or financial needs only.

Financial Terminology 

There is also the factor of terminology. Getting around financial licensing requirements is as easy as a semantic adjustment. For example, replacing the word financial with a related term such as household and the word advisor with the word consultant eliminates the need for licensing because a household consultant provides advice about managing a household, which may include financial resources and media, but is not specifically financial advice. Similarly, a personal business consultant is free to conduct business using a wide array of financial resources without having to offer any specific financial advice, but rather is merely an instrument with which clients become informed as is a financial educator and so forth.

Financial judgement

Whatever the case may be, and regardless of which consumer protections and regulations exist or do not exist, good judgement is useful. Being able to discern fact from fiction, truth from lies, information from misinformation and accuracy from less than empirically and statistically valid estimates is a skill that consumers either have in some measure or do not. Financial regulations do not protect against lack of know how or ability, at least not as much as they could. What they do protect against is fraud in its most obvious sense or a deliberate attempt to mislead that occurs in tandem with the violation of legal requirements rather than mere company policies that do not protect consumers, but do comply with the law.