David Michael Miller
For nearly two decades, David Ohnstad has been warning anyone who will listen about alleged Wall Street abuses. His email missives are familiar to many at the State Capitol and beyond.
“I’m a pain in the ass, I guess,” admits the retired Madison real estate appraiser.
Much of Ohnstad’s outrage stems from 1999, when his 90-year-old aunt lost $25,000 on some high-risk corporate bonds — a totally inappropriate investment for someone her age.
Ohnstad felt personally responsible since his elderly relative was using an investment adviser he had recommended. So Ohnstad filed a complaint with regulators at the state Department of Financial Institutions that finally led to what he called a “wrist slap” against a prominent local Merrill Lynch broker, who later left the firm.
“What the Merrill guy was doing was placing many of his trusting and unsophisticated clients into junk securities that earned him big undisclosed commission dollars,” says the silver-haired Ohnstad, 71.
Legislation enacted in the wake of the 2008 financial meltdown — including the Dodd-Frank Wall Street Reform and Consumer Protection Act — was designed to protect investors from those kinds of shenanigans. By some estimates, high or unnecessary fees are costing investors up to $17 billion annually.
But those reform efforts are now facing an uncertain future following action from the Trump administration to delay or roll back entirely a series of regulations initiated under President Obama with at least some level of bipartisan support in Washington.
The banking and financial services industry has argued that Dodd-Frank and other reforms have damaged the country’s entrepreneurial spirit and limited access to needed credit.
Republicans in Congress are also looking to dismantle the Consumer Financial Protection Bureau, a move being spearheaded by U.S. Sen. Ron Johnson of Wisconsin.
But consumer protection advocates, including the Madison-based Wisconsin Public Interest Research Group, are now raising red flags about an issue largely overlooked amid the tumultuous first two months of the Trump presidency.
“What’s most troubling is that these rules were designed to protect Americans who don’t have a lot of experience investing but are now having to make more and more of their own retirement decisions,” says WISPIRG director Peter Skopec.
Many observers are closely following what will happen to the so-called fiduciary rule. Proposed to take effect on April 10 under the Department of Labor, the rule would require brokers to put investors’ interests above their own when working with retirement accounts like an IRA or 401(k).
Perhaps surprisingly to the naive, financial industry sales people don’t have to offer unbiased advice when pitching products like mutual funds. Current laws only require them to recommend investments considered “roughly suitable” for the client.
That means if a firm carries two similar mutual funds, but one pays the broker a higher commission, they can steer you to that fund — even if the other carries lower fees and promises similar returns.
“I’m not sure how many people even know if their broker is making a commission or collecting a fee, but one role of government is to protect people from being ripped off,” says Skopec.
The financial industry has largely resisted too much government involvement, however, saying the rules have increased compliance costs and created a situation where companies only want to work with the wealthiest clients.
“What’s happening is that it becomes too expensive or risky to take on smaller customers, so those people are left without any help at all,” says Brendon DeRouin of Insurance Services Group in Verona, which specializes in retirement annuities.
DeRouin is president of the state chapter of the National Association of Insurance Financial Advisors (NAIFA), which has been fighting the Dodd-Frank rules for years. Opponents maintain that market forces are leading many firms to make changes on their own without regulatory meddling.
NAIFA has deep ties to Wisconsin. Its past national president, Juli McNeely, runs a financial services company in rural Spencer and was featured recently in a story from the Reuters news service.
McNeely says the fiduciary rules are cumbersome and have been especially difficult for smaller firms to comply with. She cheered the Trump administration for putting on the brakes.
“We were spending 45 to 60 hours a week in December just trying to get ready,” she says. “Now we have a little breathing room to make sure we do this right and not quickly to meet a deadline.”
Neither side disputes potential high costs in complying with the new rules, estimated at $31 billion over the next decade. But consumer advocates maintain it’s a small price to ensure that people are keeping more of their hard-earned money.
“There’s no question that in the minds of industry lobbyists, delay is just a step toward repeal,” says Barbara Roper, investor protection director for the Consumer Federation of America in Washington, D.C. “But if the administration follows an honest process and considers the impact on retirement savers, we have a winning argument.”
Some national firms like Vanguard or Fidelity have long maintained they are working in the best interests of their clients by maintaining low fees and not trying to “upsell” customers with things they don’t need. Vanguard founder John Bogle in a recent op-ed in The New York Times wrote that annulling the fiduciary rule “would clearly be a setback for investors trying to prepare for retirement.”
Still, even if that happens, “the fiduciary principle itself will live on, and even spread,” he wrote.
Being upfront with clients from the beginning is a strategy used by fee-only advisers, who charge a set amount for service and don’t collect commissions or skim a percentage of assets under management.
“The reason brokers don’t want to register as fiduciaries is because they have been making so much money off the old system,” says Kathy Hankard, who runs a fee-only firm called Fiscal Fitness in Verona.
Meanwhile, Johnson is leading the legislative charge to dismantle the Consumer Financial Protection Bureau. The bureau was created after the global economic collapse to hold bad actors accountable and prevent future systemic threats that could cause new crises.
In January, Johnson introduced a bill that advocates claim would significantly curtail the bureau’s ability to protect investors from unfair and predatory financial practices. Johnson has also sponsored fast-track legislation to block basic fraud and fee disclosure protections for all prepaid debit cards.
More than 221,000 Wisconsin households, or 9.1 percent of all households in the state, used prepaid cards in 2015, according to the FDIC.
“We can’t let Wall Street convince the president and Congress to re-rig the system so special interests win and everyone else loses,” says WISPIRG’s Skopec. “It’s almost like everybody has already forgotten what happened in 2008, when millions of people lost homes, millions more lost jobs, and just about everybody lost a big chunk of their retirement savings.”
Ohnstad couldn’t agree more.
“These crooks aren’t your friends,” he says. “They are not your fiduciary since they put their financial interests ahead of yours.”
