The year 2016 will become historic in the annals of financial planning and investment advice. The DOL will finalize rulemaking. The SEC will initiate rulemaking. The CFP Board will review its standards. The Institute for the Fiduciary Standard will advance Best Practices for Financial Advisors. In key respects, the debate over fiduciary duties ended last year with the DOL Conflict of Interest Rule win. The battle over the meaning of fiduciary and of “best interest” rages on. (This issue is discussed in detail in an Institute white paper.)
This battle is important because it’s about principles that will shape the future of what advice means. And its outcome is uncertain because it is not clear how well the battle will be waged. There is much ground (and market share) to battle over. The range of views espoused from DOL, SEC. FINRA, SIFMA, CFPB and the Institute reflect major differences. Differences of magnitude (apropos in a presidential election year) as between Bernie Sanders and Ted Cruz, who reflect opposing principles and interests.
On the one side, the SEC, FINRA and SIFMA have a unified view that conflicts of interest are omnipresent and inevitable and, most importantly, widely acceptable. This is the “Conflicts Are Okay” view. According to this view, the regulatory issue is no longer avoiding conflicts – or even managing and mitigating the harms of unavoidable conflicts. Instead the regulatory issue is disclosure, sometimes with consent, but virtually never with true client understanding of a complete picture of the conflict. That is, anyway, according to volumes of research and experience.
On the other side, DOL, CFPB and the Institute reject the premise of “Conflicts Are Okay,” and instead, to varying degrees, believe that conflicts of interest are a major problem to be avoided at all costs. While the groups do not agree on key particulars, let there be no doubt that there should be agreement here. We should rally around a clear and unambiguous view that conflicts of interest are inherently harmful to investors and must be avoided and unavoidable conflicts’ harms must be managed to benefit clients.
This is why the “Conflicts Are Okay” view should be vigorously rejected: Investors have a weak grasp of elementary financial concepts and fail to see the difference between advisors who operate as fiduciaries and brokers who operate as sales representatives.Conflicts of interest disclosures simply do not work. Retails investors generally cannot navigate the complexities of advice.