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11 Reasons Why Putting Brokerage Clients’ Interests First Is a Bad Idea

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Let me just apologize right up front: I know I should let this story go. But I just can’t. It’s just too good. Just when I’ve convinced myself to move on, the brokerage industry comes out with yet even more creative reasons why putting their clients first would a bad, bad thing.

I don’t think I’ve had this much fun since the CFP Board appointed REIT executive Lou Garday as its CEO back in 2001.

The financial industry’s latest contributions to its “greatest hits” list has come in response to President Obama’s remarks about the Department of Labor’s proposal to close a few loopholes though which some brokers evade having a fiduciary duty to their retirement planning clients.

“I’m calling on the Department of Labor to update the rules that advisors use for retirement advice, so that advisors put the best interest of their clients above their own. If you want to give financial advice, you have to put your clients’ interest first,” said Mr. Obama at an AARP event (as reported by Melanie Waddell in her Feb. 23 ThinkAdvisor news article: “Obama Endorses DOL Fiduciary Redraft.”)

I know, crazy stuff, right? To my mind, this is like being for mothers and apple pie.

Yet President Obama exhibited considerable political courage to buck the Wall Street money machine on the retirement fiduciary issue. And the brokerage industry was quick to respond: to my amusement, with a few more reasons why doing right is doing wrong.

But before we get to that, let’s set the stage with a couple of excerpts from the fiduciary education and accreditation company, Fi360’s February 23 blog, about exactly what kind of craziness the DOL is proposing.   

Fi360 points out that until the Office of Management and Budget completes its review, they “can only speculate on exactly what the [new DOL] rule will entail. However, we already have a good sense of what the two most significant developments will be.” The first focuses on the current definition of an ERISA fiduciary, which requires that “advice be both regular and the primary factor in decision-making.” Brokers often successfully maintain that their services are “limited to a single act and do not constitute the primary factor for plans making investment decisions.”

Did you get that? Or did you blink and miss it? To get out from under a fiduciary duty, brokers claim that because they can “sell” a 401(k) plan to a company in a single afternoon and provide no follow-up whatsoever that they should be rewarded for their lack of service by not having to put that client’s (or its employees’) interests ahead of their own or their firm’s. And courts buy this?

The second significant point in the DOL’s current proposal, according to fi360, is an attempt to close a loophole that enables brokers to avoid concerns about a client’s best interests when rolling over their 401(k) accounts into IRAs. This loophole exists because IRAs are regulated by the Treasury Department, and therefore not subject to consumer fiduciary protections under ERISA.

So when “helping” a client roll over their 401(k) funds, a broker is under no obligation to render advice in the best interest of that client. I’m sure most clients are fully aware of this and act accordingly, aren’t you? “It is expected the DOL will look to change this dynamic and make advice to roll over retirement accounts into an IRA a fiduciary function under ERISA,” the fi360 folks wrote. I should hope so.

To my mind, the DOL’s proposed changes appear eminently reasonable and client-centered: if a broker gives retirement investment advice, whether it’s for a minute or a year, it would be subject to a fiduciary standard; and when rolling a client’s 401(k) holdings into an IRA, a fiduciary standard would apply on both ends of the transaction. Not exactly radical concepts.

But, of course, that’s not the way our friends in the securities industry tell it. In her story, Waddell boosted my collection by two new industry rationalizations for why “acting in a client’s best interest” is actually “bad” for clients.” The first two come from Brian Graff, CEO of the American Society of Pension Professionals and Actuaries, who “stated that the White House on Monday ‘launched an attack on advisors and so-called ‘hidden fees’ and ‘backdoor payments’ by moving forward with a regulation that has its own hidden backdoor effect — keeping many Americans from working with the trusted advisor of their choice…all indications are that this rule will block Americans from working with the financial advisors and investment providers they trust…”

I’m not sure I can even formulate a response to Mr. Graff’s first point that if we were to force brokers whom clients already trust (albeit misguidedly) to actually be trustworthy (that is, to act in the best interests of their clients), it would prevent clients from working with those advisors, who would then be worthy of their trust. Maybe someone out there can explain this one to me: It sounds like something out of “Catch 22.”

Melanie’s second contribution to my hits list comes courtesy of Kent Mason, a partner with Davis & Harman in Washington, a law firm serving banks and large corporations: “The ‘key issue,’ is whether the Department of Labor reproposal will, like the original proposal, render illegal the means by which low-and middle-income individuals and small businesses receive their investment assistance.”

Yes, you read that right: the crazy DOL is going to outlaw investment help to the “little guys.” Then, presumably, “outlaw” brokers will be forced to give people pension advice in dark alleys and back booths in seedy bars, just ‘cause it’s the right thing to do. Tarnation, Pard, hangin’s just too good for ‘em!

It’s true: You just can’t make this stuff up.

With that said, based on my observations of the securities industry over the years, I don’t think we’ve seen their best stuff yet. So I’ve taken the liberty of drafting a few modest predictions of future arguments against the DOL’s proposals that we’re going to see when the fiduciary proposals are finally made public.

1: It’s elitist
Fiduciary RIAs represent the 1%, while blue collar brokers on Wall Street stand up for the 99%: They typically have the smallest beachfront mansions in the Hamptons, and sometimes their wives even have to keep driving last year’s models of BMWs, Mercedes or Jaguars. The DOL proposal might push that out to two or even three years.

2: It’s part of the “war on women”
Women comprise a large part of the workforce on Wall Street today. Not usually as brokers, of course, but some times they even become clerical supervisors. A fiduciary standard would cause massive cuts in their already mostly minimum wages.

3: It will decrease diversity
As we all know, a very high percentage of Wall Street brokers are Hispanic, Asian American, and African American (almost into double digits, from what I understand). Should the Department of Labor proposals become law, they would, naturally, become the first brokers laid off.

4: It will accelerate climate change
If I have to explain this to you, you obviously just don’t get it. Just picture a pair a baby polar bears swimming in the water off Battery Park.

5: It will increase our dependence on foreign oil
We all know that Wall Street is our first line of defense against the resurgence of OPEC.

6: It will cause one of the Kardashian sisters to divorce her current husband (again) 
Okay, I’ll admit, I have no idea if this would be a good thing or a bad thing.

7: It will cause the New England Patriots to under-inflate the basketballs in this season’s NBA playoffs
Hey, the Knicks aren’t going to make the playoffs anyway. 

8: It will cause Adam Sandler to make another movie
This argument alone could very well torpedo the DOL proposal. 

9: It will infuriate ISIS and the North Koreans I know, what doesn’t? But still…

10: It will drive up interest rates, crash the stock market, force tax hikes, and both weaken and strengthen the dollar
Of course, so will Sara Palin, if she appears on Fox News again. 

11: Finally, the nuclear option: It will encourage Katy Perry to sing again during next year’s Super Bowl halftime.
This development would lead even me to roll over my IRA into a broker-sold annuity. 

When you see any of these arguments come up over the next few months, don’t forget: you heard it here first. 


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