Markets

Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.

The Department of Labor’s fiduciary rule is formally on the chopping block, which means  investors need to be even more diligent about looking after their financial interests.

President Trump ordered the Secretary of Labor last Friday to consider whether to revise or revoke the fiduciary rule, which  requires brokers to act in their clients’ best interests when dealing with retirement accounts. (Financial advisers are already held to a best interest -- or fiduciary -- standard when dealing with all client accounts.)

Brokerage firms have been lobbying against the rule from the moment they heard the word fiduciary. Trump’s order doesn’t kill the rule, but it’s likely that the rule’s effective date of April 10 will be postponed to give the Labor Department time to review it.

It’s also fair to assume that the rule won’t survive in its current form, if at all. Despite Trump’s populist posturing, he has surrounded himself with former Wall Street executives, and it’s no secret where they stand on financial regulation.

Gary Cohn, director of the White House National Economic Council and former president of Goldman Sachs, recently told the Wall Street Journal that the fiduciary rule is bad for consumers -- a common scare tactic from critics of the rule. Their translation: Ordinary investors will have fewer and more expensive investment options if the rule takes effect.  

But the opposite is true. Investors are demonstrably better off today than they were before the rule was issued last April. Morgan Stanley, for example, is lowering commissions, reducing conflicts of interest and improving disclosures. Merrill Lynch is breaking out investment fees that were previously buried in client statements, which will better allow investors to dodge exorbitantly priced investment products.

And as I’ve noted previously (here and here), there are more investor-friendly products coming to market all the time. Cohn, of all people, should know this because Goldman recently introduced a suite of low-cost smart beta ETFs. 

Goldman’s foray into ETFs is a departure from its traditional, actively managed mutual funds, which haven’t been great for consumers.

Using Morningstar data, I counted 13 U.S. large- and mid-cap Goldman mutual funds that have been around for 10 years. (I looked at C-Class shares because they reflect total fees paid by ordinary investors.) Their average net expense ratio is 1.87 percent annually. Only one of the 13 funds managed to beat the S&P 500 over the last 10 years through 2016, and on average the 14 funds trailed the S&P 500 by 1.8 percentage points annually.

Falling Behind
Goldman's U.S. large- and mid-cap mutual funds have generally not kept up with the market over the last 10 years
Source: Morningstar

I also counted two U.S. small-cap funds, one global fund, two developed international funds and one emerging-market fund. Their average net expense ratio is 2.11 percent annually. One of the six funds managed to beat its benchmark (Russell 2000 Index, MSCI ACWI Index, MSCI EAFE Index and MSCI Emerging Markets Index, respectively) over the last 10 years. On average, the six funds trailed their benchmarks by 1.8 percentage points annually.

Coming Up Short
Goldman's U.S. small-cap and overseas mutual funds haven't added much value over the last 10 years
Source: Morningstar

Part of the reason the fees are so high is that Goldman pays brokers a princely sum to sell its mutual funds. Goldman collects roughly 40 percent of the funds’ expense ratios as a management fee. Roughly 20 percent goes to operating expenses. The other 40 percent is paid to brokers. That’s precisely the conflict of interest that the fiduciary rule was meant to address.  

Pricey Proposition
Goldman's U.S. large- and mid-cap funds are not cheap
Source: Morningstar

Consider, by contrast, Goldman’s five smart beta ETFs. They have an average expense ratio of just 0.26 percent annually. The ETFs offer the same traditional active-management styles used in Goldman’s mutual funds, such as value, momentum, quality and low volatility. It’s too early to judge their performance, but suffice it to say that lower fees usually result in better outcomes for investors.

Here’s the crucial point: Goldman didn’t price its ETFs 90 percent below its mutual funds out of charity. It did so because investors increasingly demand a fair deal from financial firms. Even if brokerage firms succeed in scrapping the fiduciary rule, investors can continue to press their case by making good investment choices.  

When a broker recommends a high-priced mutual fund, investors should ask how much the broker is being paid to sell the fund. They should also ask for lower-cost alternatives. And if they don’t get straight answers, they should look elsewhere.

 Cohn told the Journal that the fiduciary rule was akin to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” I doubt that giving away a chunk of their portfolios every year is appetizing for investors.    

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nir Kaissar in Washington at nkaissar1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net