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. For example, the National Association of Insurance and Financial Advisors released a survey in June that found 46 percent of their members would likely shift their customer mix to higher-income clients if the SEC proceeds.
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.
So, are middle-class households getting advice from fee-only planners? "Not much," she says. "But they're not getting much advice from anyone. They get sold stuff."
A NEW MODEL ENTERS THE SCENE
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.
More than 130 startups have launched, according to Grant Easterbrook, an analyst with Corporate Insight. The solutions include websites like Jemstep and Future Advisor, which spit out automated recommendations using algorithms. Then there are services that use the Web to connect you with a human advisor, such as LearnVest or Flat Fee Portfolios. Pending launches on his radar screen include Financial Guard, NestEgg Wealth and Quovo.
Easterbrook believes the market opportunity is enormous, especially with tech-savvy younger investors from Generation X, born between 1965 and 1980 and Generation Y subscribers, born in 1980 or later.
"The big Wall Street players have low transparency, high costs and poor digital services. Younger investors have negative perceptions of these institutions, and they're more digitally-centered - they don't put as much emphasis on in-person quarterly advice."
The biggest challenge for all these start-ups is convincing customers to sign on. "You're asking people to put their money with you, but they haven't offered convincing arguments as to why you should trust them with your money. Who's in charge? Who manages my money? What happens if you fail?"
There's plenty of volatility in the space, too. This summer, Bloomberg LP shut down a nascent online-advice service called BloombergBlack. And another prominent start-up targeting middle class households abruptly closed its doors less than a year after it launched. Nestwise was founded and funded by LPL Financial, a large traditional financial advisory firm.
Nestwise relied on a network of financial advisers using web-based tools to deliver non-commissioned fiduciary planning services at low cost. The service charged $250 for an initial plan, and a $575 annual retainer fee. Esther Stearns, who served as Nestwise's chief officer, said the $250 plan fee wasn't a deal-breaker for potential customers, but some had trouble with the retainer.
"The underlying question is, will the American middle class pay direct for financial advice directly as opposed to through product sales?" she adds. "I don't think we know the answer."
But some of these innovators will crack the code on providing inexpensive, unbiased planning help to middle class households. That could neutralize the "what about the middle class?" anti-fiduciary argument - and force some of the companies making it to play catch up.
"I'm afraid that as an industry, we're fiddling while Rome burns," Stearns says. "We're talking about legal structures and details, while others are trying to understand consumers and build exciting new products."