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The WSJ’s Public Service on Fiduciary Standard: Lifting the Veil

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Wall Street Journal editors performed a public service when they set out their case against the fiduciary standard recently. The editorial shines a bright light on arguments against the fiduciary standard that the brokerage industry, understandably, tries to keep under wraps. 

This Journal editorial is part of a raging battle in Washington between brokerage lobbyists and, well, most everyone else, over whether securities and insurance sales brokers should be regulated as professionals—like doctors—when they give advice. Or whether they should continue being regulated, as they are today, more like car salesmen. Brokerage lobbyists are fighting efforts to raise broker standards. They like being regulated like car salesmen.   

The editorial exposes the thinking and assumptions behind the anti-fiduciary campaign and nice-sounding words like “choice” and “business model neutrality.” The thinking that allows one to conclude, as Journal editors do, that serving investors’ best interests is bad for investors. 

Here is a recap of five central points in the editorial:           

1. “Brokers are already heavily regulated by the SEC which imposes myriad rules to prevent fraud, ensure that fees are disclosed and protect clients from “unsuitable” investments.” 

Wrong. Brokers are ineffectively regulated. Opacity of fees and conflicts and “unsuitable” investment recommendations permeate the industry.   

2. “Mr. Obama is making his usual argument that consumers are helpless against the predations of business people. The solution naturally involves lawyers making lots of money. And in order to avoid industry wide chaos, the Washington bureaucracy will issue a flood of exemptions.”

Partly wrong. Unsubstantiated claims of industry “chaos” that would result from fiduciary duties are just that. But if we presumed for just a moment there were a smidgeon of evidence behind the claim, then think about this. The brokerage industry today screams from the mountaintops to suggest brokers routinely provide fiduciary care. This means one of two things. Either these routine suggestions are presumptively misleading or fraudulent, or alternatively, the claims of “chaos” are hyperbole. Or both are true.   

Yet the editorial correctly notes that exemptions are inherently problematic. (However, the editorial fails to note the very exemptions it castigates exist primarily to appease brokerage firms.) The editors should argue against the exemptions and the crony capitalism they represent.

3. “Investors could boost their returns if they avoided “conflicted advice” and listened only to fiduciaries. But that’s not what the academic literature cited in the White House report shows.”

Wrong. Mounds of research associate “conflicted advice” with poorer returns. This is clear, but is not the more important point here. The underlying premise of the editorial argument, that conflicts “benefit” investors, demands attention because of its defiance of reason. The idea that conflicted advice is good—for America and investors—is backwards on its face. It defies centuries of legal writings, the human experience and common sense. Yet this backwards view of history and law is the intellectual foundation of the anti-fiduciary campaign.        

4. “Team Obama” research shows index funds “generally do better than” than “a fund manager selecting particular stocks.” “But it doesn’t mean we all should be forced to hire fiduciaries.” 

Wrong and confused. Associating the active versus passive management debate and investors being stiff-armed into hiring a fiduciary is confusing. Investors will not be “forced to hire fiduciaries,” and they will be free to choose, within the parameters of their employer’s 401(k) options, among differing investment styles and philosophies. What investors will not be able to do is work with a broker who puts his own interests and the interests of the brokerage firm first.   

5. “The most damage may come from services never provided” 

Right, but … If brokerage firms decide to leave the retirement market because they can’t put investors first, it hardly follows that investors will be harmed or cannot get better and less expensive investment services elsewhere. Overwhelming evidence suggests they can and do so today. 

“The most damage” is not to investors, but to the brokerage firms themselves. Last May, Raymond James Financial Services President Scott Curtis let this confession slip when he openly admitted brokers should oppose “the Department of Labor’s fiduciary proposal” because, “ we don’t think this is healthy for the industry.” 

Journal editors have performed a public service. They took on the job of trying to defend the indefensible. In doing so and getting at what’s underneath the nice-sounding words that poll well—words such as “business model neutrality” and “choice”—they, inadvertently perhaps, aided fiduciary advocates. The essential illogic and backwardness of anti-fiduciary arguments have been ‘laid bare.’

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