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Show Me the Data: A Dose of Reality in Fiduciary Debate

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One of my favorite books is “Freakonomics.” In it, University of Chicago economics professor Steven Levitt dispenses with economic theory, and the politics that inevitably go along with it, to focus purely on available data to illuminate perplexing issues from the decline in American education (wrong incentives for teachers), to the danger guns really pose to children (nearly 100 times less than swimming pools), to how much campaign financing affects elections (hardly at all). 

The lesson of Levitt’s work is that our ideas about how the world works (along with the myriad “thoughtful” theories that support these ideas) are very often dead wrong. To get at the truth, we need to go beyond speculation, using sound thinking based on good data. 

In the financial advisory world, we recently got a dose of good data that, if combined with some sound thinking, should go a long way to clearing up some of our “confused” ideas about a broker fiduciary standard. Michael Finke and Thomas Langdon (of Texas Tech and University of Missouri, respectively) recently released an actual statistical study of the effects of a broker fiduciary standard on the services received by brokerage clients. The short answer: There are no adverse effects at all. 

The Finke/Langdon Report contradicts—nearly point by point—the claims by the brokerage industry of the dire consequences that will befall financial consumers, should brokers be required to put their clients’ interests first: reduced choice, higher costs, limited access to financial advice by middle-class clients. By comparing brokerage services in states that have a clear fiduciary standard for brokers (4), with those that have no such standard (14) and the remaining states with a limited standard (32), Finke and Langdon found “no statistical differences” in the ratio of middle class to HNW clients, the range of products provided, the personalization of advice or the costs involved. The authors also found no evidence that the broker/dealers were affected at all. 

These conclusions will come as no surprise to independent RIAs, and dually registered advisors, who have operated for decades under a fiduciary standard with lower costs and a higher level of client service than the brokerage industry currently provides. In fact, they will probably come as a surprise to no one, except the brokerage industry itself, and only then, because someone actually took the time to gather data which refuted its vague and sweeping claims.

Why, then, is the BD industry so concerned about the client costs of a fiduciary standard? They aren’t. That argument was simply a red herring to mask its preference for selling product, which is, and always has been, more profitable. Advice, on the other hand, is messier: a concern for the best, and lowest-cost solutions, rules out many high-margin products. That could adversely BDs’ bottom lines. But on the flip side, more client-centered, defensible recommendations result in far lower compliance costs, which on balance, actually makes for better business, as some more far-sighted firms have already discovered. 

Undoubtedly, there are other views about the financial consequences of a fiduciary standard for brokers. But, without any actual data to support them, they’ll fall by the wayside as self-serving conjecture. From now on, the forces against a broker fiduciary standard will need to find a new rallying cry.


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