The Fiduciary Standard for Investment

What Does Pricing Carbon Have in Common with the New Fiduciary Standard for Investment Advisors?

The short answer: A lot.

The typical answer: These issues both seem very complicated to me, I’m already concerned where you are going with this, so let’s change the subject.

My answer: They both have the potential to alleviate human suffering, grow the economy, increase employment, and compel us to choose leaders willing to support policies that are not partisan in nature.

It is no secret that, as the use of fossil fuels has increased, carbon dioxide levels have been increasing at a rate of about 0.5% per year for the past several decades. The economic benefit of converting carbon locked up in fossil fuels for millions of years into instant energy, of course, has provided prosperity to many for the last century (e.g., inexpensive travel, food choices, home/office heating and cooling). Unfortunately, the last several generations have passed the true costs forward to the next many generations. Carbon dioxide traps heat energy in the atmosphere. The resulting disruptive impacts of excess atmospheric heat contributes to increasing human suffering (e.g., droughts, floods, wind damage). It is increasingly apparent that the true cost of burning fossil fuels has not been reflected in its price. Economists consider it a market failure when the true cost of a product or service is not reflected in its price.

If fossil fuels were now priced at their true cost, the fossil fuel age would be brought to a close and allow for a new era of sustainable energy to be established. Technology to make this happen is already in place. Improved policy making is needed to move us forward toward. A good example is the policy offered by the nonpartisan Citizens’ Climate Lobby (CCL). CCL’s carbon fee and dividend proposal was studied by an independent entity, Regional Economics Models, Inc. (REMI). The results of the analysis showed that a gradually increasing fee on fossil fuels at the source, where the collected fees are distributed as dividends to households, would transition society from an unsustainable dependence upon fossil fuels and grow the economy by generating 2,800,000 new jobs and avert 230,000 premature deaths over a 20-year period. Members of congress are aware of the CCL bipartisan proposal and are looking for signs of support from their constituents (surveys show 68% favorability of a fee and dividend approach to carbon pricing) in order to overcome the actions of the fossil fuel industry to delay the needed transition to clean energy.

Prior to 1980, most members of the middle class did not need an investment advisor – you paid off the mortgage, saved some extra cash and relied on a pension and your Social Security benefit to fund retirement. With the advent of 401k plans and the demise of pension plans, the financial services industry grew to a scale comparable to the fossil fuel industry in economic size. It took a relatively long time for policy makers to identify that excess investment management fees are a cause of significant avoidable financial loss to savers. For instance, a retired couple without pensions and a savings of $1,000,000 may expect to draw down $40,000 per year to supplement their Social Security benefits. If their investment advisor charges a fee of 1% or 2% per year over the true (i.e., competitive) cost of the service provided, the couple is getting by with $10,000 or $20,000 less per year –as little as half the amount they expected! Is this suffering? Let’s consider a single retiree who has $300,000 in savings and no pension. This retiree is sold an annuity with a 10% upfront commission ($30,000) and locked into an investment management contract he did not fully understand with an annual fee of greater than 2% per year for 10 years. Excessive, non-transparent, fees benefit few at the expense of many.