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The Wall Street Journal’s Contribution to the Fiduciary Argument

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I often think that politics is just an excuse for people to have strong feelings about things they don’t know anything about. Finance and economics, of course, are right at the top of that list, and they seem particularly attractive to clueless journalists. Perhaps it’s because so few people understand these subjects, there’s a smaller chance that anyone will call them on their misconceptions.

The Wall Street Journal, though, has always seemed to me the exception: staffed by experienced financial journalists who know their stuff, The Journal generally gets it right. That’s why I was particularly dismayed to read the August 12 WSJ editorial entitled “The Borzi Savings Bomb,” with the tagline: “An Obama appointee concocts a fictional crisis that will have real costs.” Apparently, in today’s highly charged political environment, even The Journal editorial staff is unable to look beyond partisanship to examine an important issue on its merits alone.

As the title and tagline suggest, WSJ editors are upset with Assistant Labor Secretary Phyllis Borzi’s attempt to provide IRA investors with the same protections that other retirement savers have in pension plans including defined benefit plans, 401(k)s, and 403(b)s. The fact that they don’t is only because IRAs weren’t around when the DOL wrote its ERISA regs for other plans. Borzi and her Employee Benefits Security Administration (EBSA) is simply trying to rectify this omission.

But to hear The Journal tell it, Borzi’s plan caused “bipartisan horror” in the House of Representatives, when she described the DOL’s intention “to broaden the definition of ‘fiduciary’ and submit a large swathe of investment advisers, brokers, and other to more regulation and legal liability.” What’s more, in the Journal’s view, compelling IRA advisors to put their clients’ interests first would have myriad other dire consequences, too: “Brokers would have to weigh the cost of higher regulatory compliance against staying in the business. Investors would pay more for trades and advice and have fewer investment choices. Investment educational seminars would likely halt in many cases, lest organizers think they’ll be held liable as a fiduciary for giving general investment advice.”

My heavens. I’m surprised The Journal didn’t also suggest that Social Security would become insolvent, the housing market would collapse, and the economy would go into recession. Oh, wait, that’s already happened, hasn’t it? In response to the WSJ’s claims of impending doom, Borzi calmly and rightly cited “widespread conflicts of interest in the marketplace for retirement advisory services, adding: ‘There is a great deal of evidence that these conflicts have resulted in lower returns and higher fees for retirement investors, as reflected in the Department’s own investigations and cases, SEC and GAO reports, published securities cases, academic literature and other sources.”

Now, here’s the interesting part: The Journal editors don’t deny any of the DOL’s claims. In fact, they seemed to agree that the unmitigated conflicts of interest arising from the lack of a fiduciary duty to IRA investors does result in lower returns and higher fees, and essentially responded: “So what?”.

“Lower returns don’t necessarily mean that investors were systematically cheated” The Journal replied. “Ms. Borzi and her bureaucratic minions haven’t produced a single, serious economic study that shows widespread fraud or malfeasance in the retirement savings industry.”

Can this really be The Wall Street Journal’s position? And does it capture the position of the securities industry as a whole? That advisors and their firms taking advantage of unsophisticated retirement investors by overcharging them and selling them poorly performing investments isn’t really a problem? That advisors have to be doing a Bernie Madoff before the regulators should do anything about it?

The Best Argument for a Fiduciary Standard?

This editorial is the best argument that I’ve seen yet for why all financial advisors who deal with retail customers should be subject to a fiduciary standard: The economic conflicts of charging too much and performing too little are just too powerful to be left to the good will of the financial services industry. Every professional financial advisor should keep copies of this editorial on their desks, and hand them out to every client and prospective client, saying simply: “If you care about reasonable fees and good performance, this is why it’s important for your advisor to have a fiduciary duty to you.”


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