I have been reluctant to weigh in on the Fiduciary Rule and what it means for you. I’m sure some of you don’t even know what I’m talking about. It gets a little thick in the weeds, and as with most things regulatory, the devil is in the details.
Bear with me for a moment while we get some background and definitions out of the way, this will be worth your while…
There are essentially two levels of advice in the financial services industry: Suitability and Fiduciary.
Insurance agents, stock brokers and bankers typically need only offer advice that is suitable for you. And Registered Investment Advisors have to offer advice that is in your best interest, in other words they must act as a fiduciary.
Something most people forget, and I write about frequently, is most “financial advisors” are, in reality, salespersons. They sell financial products. That’s what they do and how they earn a living.
The financial services industry is just that, an industry, a manufacturer. Not terribly different from GM, Johnson & Johnson or DuPont. It, Wall Street, is designed to manufacture financial products to sell. And most every financial product has a home. Generally not your home, but someone’s home. These products are manufactured to solve someone’s dilemma or satisfy someone’s objective.
The problem, though, is twofold:
- Most of the products for sale are so complicated that no one, outside of the actuary that designs them, really understands all the moving pieces. Because these products are so complicated and because there are so many options and flavors available, consumers have to rely to a degree on the advisor’s expertise.
- There is an inherent conflict of interest in the sale of financial products that is much more pronounced than, say, the sale of an automobile, pain reliever or chemical. Most of the time, the salesperson benefits more than the purchaser. And there is a distinct opaqueness with respect to commissions earned and fees paid. It is amazing how many consumers of financial advice and products have no idea what they are paying. Fees seemingly slither out like osmosis from your pocket to theirs.
The complicated nature of financial products is what it is, as are the myriad of choices. But, to help combat the conflict of interest and opaqueness of fees, the Obama administration, through the department of Labor, has issued a rule that insists that every advisor, salesperson or not, that offers advice on qualified plans must act as a fiduciary. That is, they must act in the clients’ best interest, and disclose all fees and all conflicts of interest.
The angst and handwringing cascading down from the richly polished and leather bound surfaces of lobbyist’s desks in DC all the way to individual advisors is something to behold. The opponents of the rule insist it will raise costs to the consumer and push the less affluent completely out of the financial services sphere of wisdom and virtue. Deciphering the spin, what they are really saying is, “If you actually understood what I am charging you, you’d never buy it.” So, of course, there is significant resistance to implementing the rule. There’s a boatload of money to be lost.
And many proponents of the rule are similarly disingenuous and self-serving. They are in punishment mode. They want Wall Street brought to heel, to pay the piper for past sins and promise to never again stray from the straight and narrow.
I, for one, and from a completely selfish perspective, enjoy the competitive advantage the lack of a fiduciary rule affords me: I am already a fiduciary, and I tout that to my prospects and clients.
On a deeper level though, there has been no compliance or regulatory hoop I have been required to jump through, and there have been plenty, that will keep me from defrauding a client if that is my intent. Regulation in its purest form is designed and written to right some previous wrong. It is rarely forward looking, and always has some unintended consequence. Someone will find a way to go around, over, above or through the fiduciary rule. Scallywags and hucksters will always be with us.
I am not anti-regulation. I am saying if the Fiduciary rule is implemented, and I do believe it will and should, it will raise costs for everyone and complicate advisor’s lives even more than they already are. It is the price we pay for living here on planet Earth in the year 2017.
To me, the real heart of the matter is not that there is the unscrupulous among us. It’s that too many of us on the consumer side are unwilling to think for ourselves and understand what, and why, we are buying. I have yet to witness any insurance agent, banker or broker in the persona of Don Corleone, accompanied by the likes of Luca Brasi who holds a gun to a prospect’s head, insisting either a signature or brains will be on the contract. At some point, individuals need to exercise some common sense and take responsibility for their own lives and the decisions they make.