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Do brokers secretly like the DOL’s proposed fiduciary rule?

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Imagine an astute bargainer at the table for the biggest negotiation of his life.

His counterpart makes the first move—and gives the bargainer 95 percent of what he’d like, plus a 10 percent bonus he never expected!

And that’s the counterparty’s opening position! How should the astute bargainer react?

The more I read into the DOL’s proposed conflict-of-interest (aka “fiduciary”) rule, the more I think the brokerage industry is in the position of this astute bargainer.

Now, don’t get me wrong. I realize the DOL’s re-proposal of its fiduciary rule earlier this year is not its opening bid, but it might just as well be.

As many now believe, under its current language, in exchange for the addition of boilerplate disclosure language in their contracts, brokers will be in a position to continue to utilize that portion of their business model which charges conflict-of-interest fees for advising clients to buy mutual funds that pay 12b-1 fees, commissions, and revenue sharing (see “DOL Fiduciary Rule as Proposed May Not Stop Investor Losses as Claimed,” October 6, 2015).

About the only thing the current draft actually outlaws are alternative investments of questionable liquidity.

Sure, this might be the bread and butter of some brokers’ business, but, really, IRAs have traditionally prohibited investments that remove assets from the trust in order to invest in non-exchange-listed entities.

That’s why, until very recently, commodities, collectibles, and even real estate represented forbidden IRA investments. That’s the 5 percent of the deal the brokers aren’t getting.

In terms of everything else, including their conflict-of-interest fees, any enterprising brokerage firm will be able to successfully retain those.

The “Best Interests Contract Exemption” (BICE) is the vehicle that permits this.

Initially, many felt the BICE prohibited the continuation of these fee arrangements. But, upon careful review of the proposed wording, the BICE, perhaps as an unintended consequence, results, ironically, in institutionalizing conflicted advice.

We won’t know this for sure until we see the results of the inevitable arbitration decisions (since this is where the DOL expects enforcement to occur), but let’s be honest, how many times have clients been victorious in arbitration?

Violating the BICE will be hard to proove because, as we all know when it comes to investments, just because it loses money doesn’t mean that it wasn’t an appropriate investment at the time of purchase.

The only clear situation where conflict-of-interest fees might be easily shown to violate the client’s best interest is in the specific case of index funds, where the returns of funds with conflicted fees can be compared to the return of funds without conflicted fees.

But even that is not a slam dunk.

It could be those “conflicted” fees may be reasonably close to the value of the non-conflicted fees, meaning the net return to the investor is the same.

So, what’s the bonus the brokerage industry receives in exchange for jumping through these additional disclosure hoops?

They can now, by virtue of the good government’s seal of approval, call themselves “fiduciaries.” What’s not to like about that?

Returning to the astute bargainer, what’s his likely response when given almost everything he wants and then some?

Why, it’s to complain the offer is unfair and ask for significantly more.

Meanwhile, deep inside and hidden from the negotiation table, the astute bargainer is laughing all the way to the bank.