Christopher Carosa of FiduciaryNews notes that two years ago, the SEC’s botched proposal for a uniform fiduciary standard was greeted with a uniform chorus of derision from both Congress and the brokerage industry. The biggest complaint was the alleged “cost” to investors should the SEC hold brokers to the same standard as it holds RIAs under the 1940 Investment Advisers Act.
The SEC asked the industry to show evidence of this cost, but, sheltered by the bipartisan boos from the political realm, it never seemed to provide the promised smoking gun. But Carosa notes that a research study released last month may have finally supplied the much anticipated evidence of cost — but with a surprising twist.
The authors of the study concluded trustees with a conflict of interest are more likely than unconflicted trustees to keep and to add poorer performing affiliated funds. Worse, employees continued to invest in these poorer performing options even though they had better alternatives. But the study also revealed something that stunned the researchers: The lowest-performance decile funds they examined underperformed by approximately 3.6% annually on a risk-adjusted basis. This figure is large in and of itself, but its economic significance is magnified in the retirement context by compounding.
Leave it to Carosa to do the math. Starting with the average underperformance of 3.6% annually, he estimates about $12.3 billion of lost performance each year resulting from the SEC standard. That’s more than a billion dollars a month, or $24.6 billion since the adoption of a uniform fiduciary standard was first proposed — the real dollar price tag the SEC’s inaction is costing retirement investors.
