There are two distinct individual retirement account prototypes — the Brokerage IRA and the Trust Company IRA — that are vying to become the self-directed IRA exemplar and dominate the $14 trillion retail retirement market, and I sense a battle brewing between the two. 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 of mutual fund assets and disrupt longstanding retirement asset monopolies.
Too many regulatory obstacles would prevent brokerage IRAs from formidably competing with the trust-company-based model and the Department of Labor’s fiduciary rule as the BD’s most imminent barrier. Meanwhile, President Trump signed an executive order delaying the Department of Labor fiduciary rule. 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.” Repealing these onerous financial regulations will have widespread economic benefits and will undoubtedly bode well for America’s small businesses and micro-investors.
There are a multitude of other regulatory challenges that broker/dealers would need to overcome 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 five-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 makes it possible for small investors to readily and affordably spread tiny increments of capital across alternative investment products, FINRA will find a way to dis-incentivize 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 broker/dealer’s product suite will be a lengthy and expensive undertaking. It will take ample time to re-educate financial advisers 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 masses.
I also doubt that many financial advisers 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 $1 million.
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-advisers, digital investing apps and online financial marketplaces. When that comes to pass, the modernized self-directed Trust Company IRA will become the only viable retail retirement option.
Dara Albright (firstname.lastname@example.org) is founder and CEO of Dara Albright Media, which specializes in the creation of fintech content and conferences.