Will middle class lose out in fight over financial advice?

Sheryl Garrett, Garrett Planning Network

Sheryl Garrett, Garrett Planning Network

If average Americans haven’t been kicked around enough this past decade, now we have this: the middle class is serving as a pawn in Wall Street’s high-stakes lobbying battle against stricter rules for brokers.

The fight centers on the so-called fiduciary standard under consideration at the U.S. Securities and Exchange Commission and the Department of Labor. It would require financial advisers to put the interests of their clients above their own. Some advisers – mostly those who charge their clients fees and don’t collect commissions – already are fiduciaries.

The standard would pose big problems for stock brokers and insurance agents who get paid mainly on commission and currently aren’t required to sell the cheapest and best product available in the marketplace. They contend that if they had to adhere to a strict fiduciary standard – in other words, recommending better and less expensive products – they’d simply stop serving lower-end clients and focus on the higher end, where they presumably could make up the difference with a new business model. New fee layers? Higher commissions? It’s anyone’s guess.

Middle class households would have no place to turn for “advice” on saving and investing for retirement, and other financial planning needs – or so the argument goes.

The idea that financial services companies – which rely heavily on the mass market – would walk away from millions of potential middle income customers strikes me as an empty threat. It does, however, point to one of the most important questions facing the industry: is there a successful model for providing unbiased, low-cost financial planning that works for middle class households?

Surveys have shown that most middle class households resist paying for advice, and consider the guidance they get from brokers to be free – which isn’t the case, since they’re paying commissions that can be hefty.

Many fee-only advisers will write a financial plan working on an hourly basis. A plan often can be constructed for about $800, says Sheryl Garrett, founder of the Garrett Planning Network of fee-only RIAs. She concedes that many fee-only planners want to work mainly with higher net worth households who require more complicated plans and may also be a source of high asset-management fees.

But all the existing models could get disrupted – as Silicon Valley types would say – by an unprecedented wave of innovation from online entrepreneurs trying to provide inexpensive advisory services online.