The other day I published an article which drew attention to a battle I sense brewing in the retail retirement industry between the Brokerage IRA and the Trust Company IRA. Although no one is really paying much attention to it right now, I promise you that this race to launch a next-generation retail retirement product will become front page news once financial services providers recognize that the winner stands to inherit the power to redirect $14 trillion dollars of mutual fund assets and disrupt long-standing retirement asset monopolies.
In the piece, I explained how too many regulatory obstacles would prevent brokerage IRAs from formidably competing with the trust company based model, and I highlighted the Department of Labor’s fiduciary rule as the BDs’ most imminent barrier.
I have no idea whether the new administration read my article or not, but just two days later President Trump signed an executive order delaying the Department of Labor fiduciary rule. So either my article had an impact on the President’s decision, its timing was simply a coincidence, or I am – as I’ve long suspected – indeed clairvoyant. My gut tells me it’s the latter, but I wish I knew for sure. Perhaps I’ll find out at my upcoming mental examination. But I digress.
Trump’s executive order challenging the fiduciary rule came on the same day as his executive action to significantly scale back Dodd-Frank, the 2010 financial bill that he refers to as a “disaster”. Or as I call it, “2,319 pages of legislation that helped big financial institutions grow even bigger at the expense of America’s small businesses and retail investors.” (See: Crowdfinance & The Future of Economic Democracy).
Repealing these onerous financial regulations will have widespread economic benefits, and will undoubtedly bode well for America’s small businesses and micro-investors.
As it turns out, just as Trump was issuing a presidential executive order on core principles for regulating the United States financial system and placing a freeze on the DOL fiduciary rule, I was in the process of penning a follow-up article underscoring the multitude of other regulatory challenges that broker-dealers would need to overcome in order to effectively compete with the Trust Company IRA model.
Hence, even if the Brokerage IRA wins the battle over the fiduciary rule, it is still going to lose the retail retirement war to the trust company. Why? Primarily because of a 5-letter acronym: FINRA.
The costs and burdens associated with FINRA guidelines will render it impossible for a new breed of retail alternative products, including P2P, P2RE and P2B notes, to reach the masses through the brokerage distribution system – despite the fact that this new product universe has the potential to deliver greater yield in a manner that can more efficiently mitigate risk.
Even as the masses demand access to greater yield and a broader array of asset classes, and even as technology and legislation make it possible for small investors to readily and affordably spread tiny increments of capital across alternative investment products, FINRA will find a way to disincentivize brokerage firms from facilitating these micro-transactions.
Whether it is by preying on brokerages’ fears of being fined and sued or instituting costly, excessive and, yes, self-serving compliance obligations, FINRA has consistently and successfully pushed brokerage firms further and further away from retail investors and right into the arms of institutional investors – helping to exacerbate the national wealth gap and impede economic growth.
Despite the necessity for enhanced diversification and the growing demand for higher yielding alternative products, bringing a new ecosystem of retail alternative investment products into the BD’s product suite will be a lengthy and expensive undertaking. It will take ample time to re-educate financial advisors and compliance officers, to introduce them to modern investment products, and to substantiate how technology is being used to mitigate risk and improve portfolio performance. It could take years before brokerages are comfortable selling alternative investment products to the masses.
I also doubt that many financial advisors will be all that eager to learn about products that cater to sub-$100 investment sizes – especially when many are even snubbing $100,000 transactions and turning away portfolios valued at under a million dollars.
Unless many of FINRA’s regulatory burdens are lifted, retail brokerage firms will no longer be able to afford to help the masses save for retirement. Most firms will likely end up exiting the retail brokerage business altogether. These are simply the unintended consequences of even the best-intentioned regulations.
Fortunately for small investors, retail brokerages will easily be replaced by financial innovators such as robo-advisors, digital investing apps and online financial marketplaces. And when they do, the modernized self-directed Trust Company IRA will become the only viable retail retirement option.