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Investing Specialists

Barbara Roper: 'Protections Have Been Under Attack'

A leading consumer advocate discusses whether small investors should have access to private markets, fee trends, and how recent financial-advisor regulation falls short.

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Our guest on the podcast today is Barbara Roper. She is director of investor protection for the Consumer Federation of America, where she has been employed since 1986. A leading consumer spokesperson on investor protection issues, Roper has conducted studies of abuses in the financial planning industry, state oversight of investment advisors, state and federal financial planning regulation, financial planning software, financial education needs of low-income older persons, the information preferences of mutual fund shareholders, systemic risk regulation, and securities law weaknesses as a cause of the financial crisis. She has testified frequently before Congress and has supported federal and state legislative and regulatory initiatives on a broad range of investor protection issues. Roper is a member of the SEC's Investor Advisory Committee, Finra's Investor Issues Group, and the CFP Board's Public Policy Council and Standards Commission.

Background
Barbara Roper bio 
Micah Hauptman bio 
Consumer Federation of America 
Consumer Federation of America, Investor Protection Division 

State of Investor Protections Today
"The Laws That Govern the Securities Industry"

Investment Company Act of 1940 

Investment Advisers Act of 1940

Growth of Private Market
"Looking Behind the Declining Number of Public Companies," by Les Brorsen, Harvard Law School Forum on Corporate Governance and Financial Regulation, May 18, 2017.

"Where Have All the Public Companies Gone?" by the Bloomberg.com editorial board, April 9, 2018. 

Accredited Investor definition

Concept Release on Harmonization of Securities Offering Exemptions, Securities and Exchange Commission.

Letter from Consumer Federation of America to SEC Regarding Concept Release on Harmonization of Securities Offering Exemptions, by Barbara Roper and Micah Hauptman, Oct. 1, 2019.

"Private-Equity Funds in 401(k) Plans?" by John Rekenthaler, Morningstar.com, July 9, 2019. 

"SEC's Proposal on Private Placements Isn't Backed by Data," by the InvestmentNews editorial board, Aug. 31, 2019. 

Investment Fees
"2018 Morningstar Fee Study Finds That Fund Prices Continue to Decline," by Adam McCullough, CFA, Morningstar.com, April 30, 2019. 

"Money Flowed to the Cheapest Funds in the Third Quarter," by Tom Lauricella and Gabrielle Dibenedetto, Morningstar.com, Oct. 18, 2019.

"That Investment Fees Are Falling Is a Popular Narrative, But It's Not the Whole Story," by Tom Bradley, Financial Post, April 4, 2019.

"401(k) Plan Quality Correlates with Company Profits," by Anne Tergesen, The Wall Street Journal, Sept. 17, 2018.

"How High Is Too High for 401(k) Fees?" Consumer Reports, Dec. 31, 2018.

Consumer Federation of America on SEC Proposal Regarding Fee Disclosure in Mutual Fund Point-of-Sale and Confirmation Documents, April 21, 2004.

Fund Democracy and Consumer Federation of America letter to the Employee Benefits Security Administration Regarding Fee Disclosure for Individual Accounts, July 24, 2007. 

Disclosure
"House Approves Bill Requiring SEC to Test Investor Disclosures," by Mark Schoeff Jr., InvestmentNews, Oct. 17, 2019. 

Speech by SEC Commissioner Cynthia Glassman, Nov. 4, 2005. 

Investment Advice
"House Members Urged to Vote Yes on Bill to Improve SEC Disclosure Effectiveness," Consumer Federation of America, Oct. 11, 2019.

SEC Proposed Regulation Best Interest 

Regulation Best Interest definition 

"SEC Passes Regulation Best Interest, but Fiduciary Rules Could Make a Comeback," by Andrew Welsch, Financial Planning, June 5, 2019. 

"SEC's Regulation Best Interest Comes Under Attack," by Melanie Waddell, ThinkAdvisor, Sept. 24, 2019. 

"What Investors Need to Know About Regulation Best Interest," by Aron Szapiro, Morningstar.com, June 14, 2019. 

The SEC's Best-Interest Proposal: What We Told Regulators," by Aron Szapiro, Morningstar Blog, Aug. 8, 2018. 

Form CRS Relationship Summary; Amendments to Form ADV, SEC.gov. 

"SEC's New Customer Relationship Form Confuses Consumers," by Melanie Waddell, ThinkAdvisor, Sept. 13, 2018.

Retirement
"Court Overturns Obama-Era Rule on Retirement Planners," by Tara Siegel Bernard, The New York Times, March 16, 2018. 

"Think Your Retirement Plan Is Bad? Talk to a Teacher," by Tara Siegel Bernard, The New York Times, Oct. 21, 2016. 

"Teachers and Annuities: A Questionable Match and a Hard Product to Shed," by Ron Lieber, The New York Times, March 16, 2018. 

"The Annuity Trap Teachers Need to Avoid," by Leslie P. Norton, Barron's, May 25, 2019. 

"SEC Probes Practices in Public-Sector Retirement Plans," Barron's, Oct. 9, 2019.

"Legislation That Aims to Help Workers Save," by Aron Szapiro, Morningstar.com, April 12, 2019. 

"House Passes SECURE Retirement Bill With Massive Bipartisan Support," by Greg Iacurci, InvestmentNews, May 23, 2019. 

"What the New Retirement Bill Means for Savers and Retirees," by Reshma Kapadia, Barron's, May 26, 2019.

Christine Benz: Hi, I'm Christine Benz, director of personal finance for Morningstar, Inc.

My guest on the podcast today is Barbara Roper. Barbara is director of investor protection for the Consumer Federation of America, where she has been employed since 1986. A leading consumer spokesperson on investor protection issues, Barbara has conducted studies of abuses in the financial planning industry, state oversight of investment advisors, state and federal financial planning regulation, financial planning software, financial education needs of low-income older persons, the information preferences of mutual fund shareholders, systemic risk regulation and securities law weaknesses as a cause of the financial crisis. She has testified frequently before Congress and has supported federal and state legislative and regulatory initiatives on a broad range of investor protection issues. Barbara is a member of the SEC's Investor Advisory Committee, Finra's Investor Issues Group, and the CFP Board's Public Policy Council and Standards Commission.

Barbara, welcome to The Long View.

Barbara Roper: Thanks for having me.

Benz: Thanks so much for being here. Let's start with sort of a big-picture question, which is that, you've been very critical of the lack of investor protections in your work at CFA, but fees keep coming down. So, how do you think things are working for investors today? And where are the biggest gaps in investor protections in your view?

Roper: So, if you think about the sort of general structure of U.S. securities regulation, the general framework Congress put in place after the crash of 1921 has been remarkably successful. I don't think anyone could argue with that. The bones are good. You know, this basic idea that we're going to have transparency for companies that want to raise money from the general public, added regulatory requirements for pooled investments, the Investment Company Act, added obligations for investment professionals, the broker/dealers and investment advisors that investors turn to for advice and regulations. That whole concept and structure I think is a very good one. But we see a variety of ways in which it's challenged today either in some places where it hasn't kept pace with changes--not my strongest area of expertise and probably one of the primary areas of interest for your viewers--it strikes me that the Investment Company Act has been strained by some of the innovation that has occurred in that space. Or we see regulations that haven't been updated to reflect the democratization of markets, or where protections have been under attack from those pursuing a deregulatory agenda.

So, for example, we have this system of securities regulation that was set up that any company that wanted to raise money from the general public had to register its securities with the SEC and provide the essential facts necessary to an informed decision. But we have considerably more money today raised in private offerings without that transparency than we have raised in public markets. And we have companies growing to immense size as private companies without the discipline and transparency that goes with being a public company. And we see our public markets in serious decline. We have fewer public companies today than we did in the late 1970s, considerably fewer. We have well under half the number of public companies that we had at the peak in the late 1990s. And that I think is a problem for investors of all stripes—institutional investors, retail investors. I think, ultimately, it's a problem for the economy. So, that's an area where we think there needs to be a serious rebalancing of the public versus private markets, but where we see regulatory policy at the SEC going in exactly the opposite direction.

Benz: So, let's discuss that. Because I know you and your team have been vocal on that topic. Let's talk about where we are now with respect to retail access to private equity investments, and sort of where you think the SEC should step up and take a closer look.

Roper: So, I see no demand from retail investors for increased access to private equity investments. What I see is a demand from private issuers for increased access to retail investors. But if you look at the numbers that we have, the data is minimal at best because the SEC doesn't even collect enough data to know what's going on in these private markets. But if you look at what data we have, something like maybe if you're generous, 2% of the accredited investors who are eligible to invest in private offerings, do so in any given year.

Benz: So, let's just discuss what an accredited investor is, what's the asset threshold there?

Roper: Right. So, back in the 1980s, up until that time, the SEC, the courts at all held that the basis for a private offering was one in which investors had access to the kind of information they would have in a public offering by virtue of their close relationship to the issuer. Back in the early 1980s, they went in a different direction and said they were going to allow sales to individual investors without any particular relationship to the company, without any particular special access to invitation on the, I think, deeply flawed theory that wealth and sophistication can substitute for access to information. And so, they set thresholds based on income and net worth--$200,000 per individual income or $300,000 for a couple, two consecutive years, or a $1 million in net worth--and use that as the basis for allowing individuals to invest in private offerings. And you see, in the wake of that, the private markets started to take off--significant growth throughout the 1980s. And then, a series of subsequent regulatory changes, which only accelerated that.

In the Dodd-Frank Act, they at least took the value of the home out of that net-worth equation of the primary residence. But those thresholds haven't been adjusted, so they've been eroded by inflation. There's no evidence that they ever actually accurately identified a population of investors who can fend for themselves without the protections afforded in the private markets. And now, we see the SEC looking at how can we expand access beyond this accredited investor pool, when, as I said, there's no evidence that that's a demand that's coming from investors. It's coming from those who want to sell to a broader pool of investors, including in their retirement plans.

Benz: So, you would push back on the SEC further opening the floodgates to allow retail investors access to private investments?

Roper: Absolutely. And if you think about it, there are sort of two categories, right? There's the private operating companies, you know, companies that are raising money in private offerings under, say, Regulation D or whatever, and they're the private funds. And the private funds are the ones who are sort of pushing to get into retirement accounts. But I'm not sure they've thought through what the implications of that are, because how can you allow them into retirement accounts without requiring some kind of standardized reporting of performance, or some kind of transparent and standardized reporting of costs? And what's going to happen the first time one of these investments blows up, and we hear all of the heartrending stories about individuals whose retirement money is lost? Are they prepared for the regulatory scrutiny they're going to get at that point? I think the private fund industry has prospered and done very well under their sort of light-touch regulatory approach, dealing with a very wealthy and largely institutional client base, and I don't really think they want what comes when you start selling to individual investors who are investing for their retirement.

Benz: So how do you and your team approach an issue like that? So, say, you are looking at this and you say, Well, I think, this is not a good thing for retail investors. What's your battle plan? What steps do you go through to advocate for that point of view?

Roper: So, I mean, the first--on this latest project, the SEC had a concept release on the private-offering exemptions. Both, my colleague Micah Hauptman and I, did a very deep dive in terms of research. We read every law-review article we could get our hands on. I went back and read all of the committee reports on the 33 Act and 34 Act. And I'd already, in an earlier project, read the entire legislative record for the Investment Company Act and Investment Advisers Act, all the early rule-making releases from the SEC to understand the thinking behind the regulatory protections in place and then, as I said, every law-review article, newspaper articles, whatnot, to educate ourselves. And then, Micah and I typically put our heads together and walk through the issues, how we're thinking about it. We reach out to other people whose views we respect and get their input. And that's the first step to writing our concept--you know, our comment letter. We reach out to friendly offices on the hill to make sure they're aware of our concerns. We try to communicate with reporters of different kinds who might be covering these issues. And we write these comment letters. I think nobody but us and some poor lawyers at the SEC actually gets through them all. But the idea is to make sure that we raise every issue that needs to be raised as part of the regulatory record so that when the SEC does take the next step to move towards rule-making, those arguments have been made. They have to respond to them in developing their rules in order to avoid a legal challenge on the grounds that what they've done is arbitrary and capricious.

CFA is not well positioned to make legal challenges to rules themselves. So, that's not really part of our agenda in terms of how we approach these issues. But we do consciously think about the fact that someone else may want to file a challenge and how we can contribute to the record that would be used in that way. Because right now—you know, sometimes you communicate with the hope that your message will be well received at the SEC and you can persuade someone. But that, currently on this set of issues, just doesn't seem to be a realistic expectation, at least with the leadership. Although I have to think there's some staffers secreted away at the SEC who have watched this dramatic decline of our public markets--have seen the role that some of these previous deregulatory moves have made and causing that decline. So, I have to think there's some people squirreled away inside that agency or sympathetic. But general, right now, we're not really expecting that the leadership at the SEC will be persuaded by our arguments.

Benz: Right. So, switching gears, you and your team have done a lot of work on fees over the years. As I said at the outset of the discussion, we're seeing investors choose very low-cost index funds and exchange-traded funds. So, what's sort of the next frontier of that discussion about fees? Is there still more room for improvement and what part of the fee front still needs work in your perspective?

Roper: So, I think there are sort of two pieces of that. One is that we've seen in some areas a corresponding rise in the fees that investors pay on account fees. In other words, as a lot of the big dual-registered firms are increasingly moving investors into advisory accounts where they pay an asset under management fee ...

Benz: Instead of a commission.

Roper: Instead of a commission. Some of the fees at those firms are quite high. It's hard to tell exactly what people end up paying because their disclosures can also be quite opaque.

Benz: Right.

Roper: But significantly higher than what I associate with this sort of traditional investment advisor asset-management fee of 1% for comprehensive financial planning. So, that's one area where we've seen fees get compressed on one side only to pop up on another side. And then, the other thing—and we haven't gone back and looked at the data on this for a while. But what we've seen when we've looked in the past is that the averages when you look at the fees are down because there are some very good, very large low-fee shops and you see them dominating the retirement plan market, which is where a lot of the money is. And so, it drives a very positive overall picture. But when you look in different channels, in particular when we've looked in the past at the broker-sold channel, we see significantly higher fees persisting there.

There's no doubt--I mean, when I started working on this, 8.5% front-load was standard, right?

Benz: Right.

Roper: And I've paid an 8.5% front-load in my life. So, I feel the pain.

Benz: Yeah.

Roper: And so, there's no doubt that there's been this pressure on commissions and whatnot. I don't want to discount that. It's been a positive development and a pressure on the administrative fees as well. But it's not—not everyone is enjoying the benefits of that. And as just one example, when you look at some of the small-company retirement plans, you can see egregiously high costs, costs so high that they basically pretty much erase the tax benefits. That's an area that is still ripe for reform, and not to mention, of course, the 403(b) market.

Benz: Right. So, I want to focus on retirement planning a little later on. But before we leave this topic of fees generally, what do you think is the best way to light the way for consumers in terms of helping them understand the totality of the fees that they're paying, not just the fund expense ratios, but all the other stuff that can drag on their returns? Is it dollars-and-cents disclosure? What do we need to do here so that people can see sort of a clean number of their all-in costs?

Roper: Right. So, a dollar-and-cents disclosure I think is absolutely part of it. We know that individuals don't have a good understanding of costs when they're presented as percentages let alone basis points. And they tend to think costs are low. They don't have a context to compare costs to. So, if it's a little--what looks to them like a little number--you know, 1.8% looks like a little number, right?

Benz: Right.

Roper: If it's the administrative fee on your mutual fund, it's not such a little number. So, I think both dollar-amount disclosure and providing some helpful context for those disclosures, helping people measure whether they're low, average, or high for a particular category is necessary. And then, I think beyond that, the focus needs to be on total costs. We've tended to break it down into sort of two simple concepts. What am I paying for the sort of operation of this mutual fund and what am I paying for the services of the broker or advisor in selling me this fund or managing my account? And then, what's the total impact of that?

Benz: Right.

Roper: But ultimately, I'm somewhat skeptical that disclosure alone solves that problem. I think there's a lot of benefit from third-party analysis like that, that you provide at Morningstar that helps people put it in context, because I don't think our regulators are going to design regulations that put it in context. I don't see the SEC developing a rule that would require a mutual fund to identify that their costs are higher than the category average. And that's not an issue with just this administration. There's been a reluctance to go down that route at the SEC for many years. But I do think the Internet does make it easier to provide the kind of tools that help with that analysis. But ultimately, they can help with that kind of analysis for the do-it-yourselfers.

Benz: Right.

Roper: But ultimately, for those who rely on recommendations from a broker or an advice from an investment advisor, I really think the obligation has to be on the professional to do what's best for the investor and disclosure isn't going to solve that problem. Particularly because we know--most of the disclosures investors get today read like exactly what they are: documents designed and written by lawyers and securities experts to be understood by other lawyers and securities experts. And the typical investor doesn't have a clue. And it's not because they're stupid. I mean, no one would suggest, you know, if we just did a better disclosure, if doctors or lawyers had to provide better disclosure, investors would be able to make better healthcare and legal decisions. We rely on disclosure to do things that they can't reasonably be expected to do. The cost disclosure ought to be something that you can do effectively. We just don't do it effectively now.

Benz: Right. So, speaking of disclosures, the House just passed the SEC Disclosure Effectiveness Testing Act, which the Consumer Federation supported. What does that bill aim to do? And also, do you see it being signed into law?

Roper: So, the good news is that there's actually been a lot of progress in recent years in this area of designing disclosures that investors can understand. And there are companies that make very good use of these advances. And there are other government agencies that do as well. And one of the things that people do in that context is on the very front end is their designing disclosures; they build in qualitative testing in order to determine what is and isn't working in the disclosures, and then to go back and revise and it's a sort of iterative process. It's not a, Oh, we tested it now, we're done. And you can make significant advances in terms of improving the understandability (is that a word?) of the disclosures you design, so that it's not just a bunch of lawyers at the SEC saying--I mean, they're very well-positioned to know what's important about an investment. But it's not just a bunch of lawyers at the SEC saying, you know, this is what we need to disclose and a bunch of investor advocates like me saying, I don't think that is quite right. You actually go in and test it and see if it works or not, and what you can do to tweak it and improve it. And so, what congressman Casten's bill would do is require the SEC to incorporate that kind of testing in the development of new disclosures that are designed for the retail market. So not the big, you know 10-Ks, 10-Qs of public company disclosure, but the ADV form, the new CRS, the mutual fund prospectus, and shareholder report and summary prospectus are the types of documents; the proposal the SEC has on annuities—those kinds of disclosures—bill-testing in on the front end to make sure that you do what you can to make the disclosures as effective as possible. And then, in addition to building that into new disclosures, it would have the SEC with input from the Office of Investor Advocate, sort of develop a timeline for going back and testing existing disclosures, prioritizing those that are relied on heavily by retail investors to see if there are improvements that we can make. Because all of the testing that has been done—you know, the SEC has known for years that it's relying on disclosures that investors don't understand.

So, it shouldn't be controversial. I mean, this is actually—it was a republican SEC Commissioner Cynthia Glassman, who first pushed the SEC in this direction—you know, what, a decade ago or more now. And it shouldn't be a partisan issue. Because it came up in the context of Reg BI, where everything was controversial, it's gotten Republican support that I don't actually think is based… I mean, this should be a Republican dream bill. They believe, as they say, in evidence-based regulation. This should be something that they embrace. And I don't think it's easy to get that legislation through and signed into law. In this environment, nothing's easy. But I do think at least in the long run, this is a bill that ought to be able to be enacted into law. Once we can get sort of the Reg BI contentiousness behind us, if people can look at it with an objective eye, I don't think Republicans will find anything to object to here.

Benz: OK. So, you mentioned Regulation BI, Best Interest, a couple of times. And I want to talk about the state of that. But before we get into that, I'd like to talk about the advisory landscape more broadly, because it seems to me that the landscape for consumers attempting to choose an advisor is really confusing. It still feels like a Wild West to me. I'd be curious to get your take on that question. And what do you think could be done to help light the way so that consumers actually have a fighting chance at choosing an advisor who is focused on the types of things that they need, is reasonably priced, and so on?

Roper: Right. So, I agree with your basic characterization. The hope was with this regulatory package, you know, regulation best interest, that it would help to alleviate some of that confusion. My own view is that it's a missed opportunity in that regard. I'm concerned that it may actually make things more confusing in some ways. But what we have is, over the years, we have regulations that treat this world as if we have two distinct populations: broker/dealers who sell securities--affect securities transactions, to use the legal language--and investment advisors who provide advice. The reality is that what we have is a range of people, both within each of those categories and then combining the two categories that just don't fit cleanly into either one of those categories, where the lines between them are blurred. Investors do not understand the differences between them, because the titles they use, the way they describe the services, the nature of the services themselves, are essentially indistinguishable or a nonexpert.

So, there were two approaches we thought could work. One is that you sort of put people back in their boxes. We reestablish clear distinctions between brokers and advisors. And brokers are strictly salespeople, advisors are strictly advisors, and investors get to choose between them. My own view is, one, that ship has sailed, but two, I'm not really sure it's the right approach for investors. Are investors really better off if brokers are strictly sales people and they're not making the sort of moves that some of the firms have made toward more goal-based, sort of planning-based kind of recommendations. I don't think that's necessarily the best thing for investors. So, the other idea was, you set the standards, such that it doesn't really matter if the investor doesn't really understand these regulatory distinctions because the protections will be comparable and adequate in either arena. And so, they can then just purchase the services, select the services that they want based on what they think they want, which is a hard-enough task as it is.

And the SEC didn't do either of those things. They left brokers free to market themselves as if the primary service they offer is advice. They made some very minor tweaks to the ability of a shrinking population of stand-alone broker/dealers to call themselves advisors, but not to prevent them from calling themselves financial consultants or wealth managers or anything else they might have used. No restrictions on how they market those services. So, no real advance in terms of clarifying those distinctions in that way. And then, form CRS, the customer-relationship summary, which is this new disclosure document that brokers and advisors will have to provide that's supposed to help investors understand these key differences.

It's a good concept poorly executed is how I would put that. I mean, it's two pages for a stand-alone broker and advisor, maximum of four for dual-registered firm, where they have both brokerage and advisory accounts. And it has a lot of ground to cover, including conflicts of interest—you know, fees, conflicts of interest, legal obligations, services provided—which sort of by definition means the disclosures are going to be abbreviated. I mean, some of these big dual-registered firms, it takes 10 pages in their ADV form to describe all of their conflicts of interest. You know, it's not done and I'm not talking about that. That's not a case where more is more. The disclosures are incomprehensible. I'm just not sure this document—we haven't erred too far on the other side. And then, the fact of the matter is, we did testing of their sample document when they first put the proposal out, CFA worked with AARP and the CFP board to test their sample document, do the kind of qualitative testing we were talking about earlier, and investors were bewildered by it. The SEC included a very small amount of qualitative testing as a part of their RAND study with similar results. So, their answer was not to sort of go back and fix it, because that would have slowed down this regulatory package and they were hell-bent on getting that done. But to just give firms more flexibility in how they implement it. So, now, where they're going to be, they're not even going to have the benefit of consistency from firm to firm. So, I don't think that's going to solve the confusion problem.

So, our view is, in this current regulatory environment, where we don't believe the standards are adequate either under the Advisers Act fiduciary duty or under the broker/dealer Reg BI to protect investors from the harmful impact of conflicts of interest. I think one of the first things— we're sort of back to first principles, when I first started doing this 37 years ago, is find a firm where the business model really minimizes conflicts. And if what you want is financial planning, you know, think about the field of the financial planners; look for the CFECs certification for firms or the accredited investment fiduciary for individuals for people who are being audited for their compliance with a higher fiduciary standard than the SEC is willing to impose. Assuming the CFP board comes through with good guidance on the implementation of its fiduciary duty, I think that's another place to find people across a variety of business models who are being held to a higher standard than the SEC is willing to impose. And the good news is, those kinds of services are available in a variety of forms, formats and at a much lower cost than has previously been the case. When I started doing this back in the 1980s, fee-only planning really was strictly the purview of a very wealthy group of investors. And between the robos and the hybrids and the retainer-fee model and the hourly fee firms with the implementation costs as low as they are on some of these platforms, that option of having really fiduciary advice with minimal conflicts is available to a much broader swath of the investing public at a much lower price. That's one of the real areas of progress we've seen since I've started.

Benz: So, do you favor any one business model for consumers seeking financial advice? Or do you think that a variety of these business models can actually work OK?

Roper: So, our preference would be for a variety of business models all held to a high standard. There are people for whom a commission account is a better option than a fee account in light of the services that they need. The problem arises when there are so many conflicts of interests associated with that business model. They have nothing to do with the fact that they're paid with a commission. But that different investments pay very different commissions. You get 1% payout on this and 3% payout on this and 6% payout on this and, God knows on some of the alternative investments, so that the incentives to recommend what's in the broker's best interest rather than the customers are significant, and revenue-sharing payments and all of these things sort of happening in the background that the investor doesn't understand. So, our hope was that Reg BI would serve to develop a broker/dealer business model, where you really did have a condition-based business model that was designed to be consistent with investors' best interests. And I think it's still possible for firms to develop that, and we'll see what happens when they implement the regulation. And we'll certainly be looking for firms that go the extra mile to eliminate the extraneous conflicts of interests associated with brokerage accounts. But absent that, I'm back to being very skeptical of that business model as an acceptable option for most investors who will not understand the conflicts of interest will not recommend bad advice when they get it.

But I would say the same is true increasingly for some of the advisory accounts. If you look at the world that existed when the Advisers Act was written, you could kind of get away with the very disclosure-reliant approach to fiduciary duty, because you didn't have all of these extraneous conflicts in those accounts. And look at how the Advisers Act treats principal trading. You can tell that Congress at that time really wanted this to be an account model that have very minimal accounts. If you're getting paid, you can't eliminate conflicts entirely, but really leave it at that, right, the fact that you have as an advisor have an interest in maximizing compensation and the investor has an interest in minimizing what they pay and this will sometimes come in conflict. But now, we have these advisory accounts where they have revenue-sharing payments or proprietary products or different share classes with different levels of payouts and etc., and you've seen the SEC sort of try to go after those with some of their share-class initiatives, which we view as a positive development, limited, but positive. But I just don't think it goes far enough to really protect investors from those kinds of conflicts. As I said, I think most people will do best if they can find, in whatever sort of basic format it's offered, an advisor who really is to the extent possible just paid to work in their best interest.

Benz: Right. So, that brings me to an even more basic question, which is whether there should be minimum education requirements or credentialing for people proffering financial advice. What do you think about that question?

Roper: So, it's not a question that CFA has ever developed a formal policy position on. It comes up periodically. Back actually, when I first started working on these issues, there was a fairly significant movement afoot to try to get some minimum standards necessary. For example, to call yourself a financial planner, or to have the CFP be required or whatnot, and that pops up periodically. And I certainly, as someone who works with a financial planner, value the fact that my financial planner has extensive training and expertise. I guess it's never been a realistic-enough policy option that I put the work into analyzing the risks that you create, barriers to entry, or that you set standards that are too low to be really meaningful against what it should look like. But I absolutely believe that when someone's going to be relying on someone for advice about their investments, advice about their finances, looking for someone who has some expertise, seems like a pretty obvious first step.

Benz: Right. So, the onus should still be on the consumer to ask what sort of credentials you have.

Roper: Well, whether it should be or not, it is. And I don't have, I don't have a clear vision about how you do that differently is I guess what I'm saying. I'm not saying that I think it's a bad idea to do it differently. Just that I haven't thought through what that would look like if you were going to go that route.

Benz: Right. Let's switch gears and talk about retirement, which you referenced at the outset of our discussion. Let's talk about the fact that many folks, many workers, simply aren't covered within the context of their workplace, that they don't have any sort of plan that they can contribute to. What are your favored solutions to that issue, that sort of hole in coverage in terms of employer-provided plans?

Roper: Do I have a favored solution? So, you have about half the population roughly that has, like, no investments at all, where you really are talking about—for a significant part of the population--what you're really talking about is, you need to make Social Security a reliable source of income, you need to make sure healthcare costs are covered, you need to sort of think about it as a social safety-net issue because individuals simply aren't making the kind of money that is going to enable them to solve this problem...

Benz: They can't save.

Roper: Right. And obviously, then beyond that, we certainly encourage companies to make these benefits available to their investors—if a little consumer organization like CFA can have a nice, you know, healthy 401(k) plan with a match, I think others can do that as well. It's not as hard and there are enough sort of options out there with a small-plan market in mind that it's not as burdensome. But there again, there's been some of the changes that have been made like automatic enrollment, automatic increases that I think are helpful. But I do think a system that relies on individuals to make sound investments in order to afford secure and independent retirement is putting a lot of weight on people who either, because of their financial limitations or their lack of investment expertise, are not positioned to do that well. I think this system has some pretty significant fundamental flaws built into it.

Benz: So, how do we address those? Do you ...

Roper: Do you want solutions? My job is pointing out problems.

Benz: There are these multiple-employer plans that are coming online, the SECURE Act, which is wending its way through Congress, would provide for more of those multiple-employer plans. Is that part of the idea that you can sort of allow small employers that maybe don't have the expertise or the wherewithal to set up their own plan to maybe bolt on to one of these multiple-employer plans? Is that maybe an idea?

Roper: So, I will say that on those sorts of issues, CFA largely defers to AARP and AFL-CIO, and some others who have the resources to engage--you know, Micah and I are—you keep talking about our team.

Benz: You too.

Roper: It's more of a partnership. And we've had our hands full with other issues. I will say, I think one of the big losses that we suffered when that Department of Labor fiduciary rule was overturned, is that the Department of Labor understood the extent to which many small employers—they have more in common with individual investors in terms of their level of investment sophistication than they do with the big firms with human resource departments to oversee this and the ability to hire consultants and whatnot. And so, under the Department of Labor rule those small plans enjoyed the same fiduciary protection. So, it wasn't just, the onus wasn't just on the employer, but it was on those who were advising the employer. Because one of the things we've seen is that, as I mentioned earlier, is in this small-plan market you just see some really bad plans.

Benz: Yes.

Roper: I don't think there's any other way to put it. And there are also—obviously, it's more challenging. There are certain costs that have to be borne and it's more challenging. You don't get the benefits of scale. But there are good plans available in the small-plan market as well. So, that was a real loss. I think we had a potential to benefit millions of Americans indirectly if we could have improved those small retirement plans. And I'd love to have an opportunity to come back and try to fix that again. As I mentioned earlier, the issue that just sits there on the horizon that's so challenging, that I'd really like to be able to work on, is the issue of non-ERISA 403(b) plan.

Benz: Yes. Let's talk about those. So, those are—a lot of educators have access to a 403(b) instead of 401(k). Why are they so bad? I know a lot of them have annuities, for example, and can be very high cost.

Roper: Right. So, the way they were set up, the investment options were limited, so that they were dominated by annuities early on and how they were structured. And they're not subject to ERISA. I think the thinking was that you can't put school districts or whatever on the hook for being the fiduciary under ERISA. So, they don't have the protections that go with ERISA. And today, they have typically more options. Like, if you look in the California system, there's an option--vis-à-vis a Vanguard option and a CalSTRS option and other states where they have good options in them. But the people who aggressively go out and market the plans are the annuities sellers.

So, I heard recently that something on the order of 50% of the flows in the California system, 403(b) system, are into fixed-indexed annuities, even though they have very good low-cost options available in the plan. Because the model is, the insurer hires the retired teacher to go in and talk to teachers in the lunchroom, the faculty lunchroom or whatever, and sell the product. And so, now you have teachers who are already, I think, almost universally underpaid, who in many cases are buying classroom supplies out of their own meager paycheck, and we've saddled them with the worst retirement plan we have. It just strikes me as appalling. But because that's an issue that you kind of have to tackle at the local level, it's a challenging one to work on. But I still have a few more years before I retire. And it's sitting there as the thing I would really like to devote some serious time and attention to.

Benz: Yeah, it seems like--maybe it's just my little world--it seems like there's a little bit of a drumbeat of attention in the 403(b) space and just how bad things are, which is encouraging.

Roper: Yeah, we had those terrific articles in The New York Times by Ron Lieber and Tara Siegel-Bernard, which helped to draw attention to the issue. And I think, there's been some other good work done and there's some passionate true believers out there in the advisory world who are committed to trying to help teachers make better choices with their retirement savings. So, I agree that there's sort of a network there, the opportunity to do something. We just need to think through the concrete strategy for getting it done and then do a ton of the backbreaking work of trying to approach an issue one state at a time, one school district at a time, one whatever.

Benz: Right. So, speaking of annuities, the SECURE Act, which is currently in Congress, under consideration by Congress, would allow 401(k) Safe Harbor to offer annuities inside the plan. I feel like there's kind of a difference of opinion among knowledgeable, well-meaning people about what this might mean. It sounds like you think this isn't such a great idea, but I'd be curious to hear from you in your own words.

Roper: So, I think the execution of this is particularly problematic. And annuities—you know, I spend a lot of time bad-mouthing annuities—the concept behind annuities is a good one. There are many people who would benefit from a steady, reliable stream of income in retirement, protection against outliving their assets, etc. It's a good concept. But the industry has developed in a way that didn't really put its best foot forward, if you will. The products that have really been pushed are those that are most profitable for brokers to sell rather than those that are really designed with investors' interest in mind. And Congress had an opportunity with the SECURE Act, to do this right, to say that in creating this Safe Harbor, they were going to limit it. We would have liked to see them limited in two ways.

One: the Safe Harbor itself is for the selection of an annuity provider. But it's so broad that basically any annuity company that's in basic compliance with state law qualifies. So, there's no attempt to limit the Safe Harbor, for example, to the most financially sound insurers. So, we would have liked to have seen some distinction made there because these are products--sorry, I keep interrupting myself--but these are products whose only value comes from the insurance company's ability to keep its promise in the future. Financial health of the insurer is a pretty significant factor to weigh.

So, then the second thing, there are certain types of annuities. Immediate fixed annuities, for example, where the costs tend to be quite low; the insurers have a good history of sort of pricing the risk in those annuities. And if you wanted to include those kinds of options in a 401(k) plan, we'd be much more receptive to that as a potentially beneficial development, but they didn't restrict it in that way. And what they said is, that's OK, we have these ERISA plans and the plan sponsor is going to still have the responsibility for choosing the actual products that are in the 401(k) plan under their fiduciary, ERISA fiduciary standard, which in theory, is great. The problem as we were talking about is, a lot of plan sponsors don't have that expertise. And when we look at that small-plan market, the really high-cost plans, the insurance plans are among the worst offenders. So, holding up this theoretical benefit of the ERISA fiduciary standard is going to protect everyone against the reality of what the world looks like. We just don't find that all that reassuring.

Benz: Well, Barbara, I think I could sit here and lob questions at you all day. Thank you so much for taking time out of your busy schedule to be here with us today.

Roper: Oh, it's my pleasure. Thank you.

Benz: Thank you.

Roper: Bye-bye.

Benz: Bye-bye.

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