Is it just me, or are you, too, somewhat dismayed at how many issues these days seem to come down to what the “definition of ‘is’ is”? Case in point, the new round of caterwauling about the DOL’s newly announced rules for IRA advisers. The major points of contention seem to be what it means to act in a client’s “best interest,” and what could possibly be meant by “reasonable compensation,” when it comes to commission
Over the years, I’ve started to suspect that many of the folks who are so interested in “definitions” are really looking for “safe harbors” from which to stretch the rule in question. And the reason they push for hard and fast definitions is that if and when the definition writers make even one small mistake, leaving one tiny loophole, they’ll fly enough private 747s through it to look like JFK on a Friday evening. (See my April 6 blog “DOL Fiduciary Rule: A Simple Solution,” about the small loophole in ERISA that created the trillion dollar IRA rollover business.)
In contrast, the ’40 Act requires RIAs to act in the best interest of their clients, and the vast majority of them do. They find out what their clients want and need from their investment portfolios and recommend low-cost products that give them a high probability of reaching those goals. They do so while eliminating financial conflicts that would give them incentives to act otherwise.
It’s just not that complicated, unless you want it to be. (Yes, I’m aware that Bernie Maddoff was an RIA, but he was also the owner of one of the country’s largest clearing broker-dealers and a board member of NASD/FINRA. Not exactly your typical RIA.)
So if it’s all so simple, why did the Institute for the Fiduciary Standard (IFFS) hold a press conference on April 19 to roll out its new “Self Assessment Verifications to Evaluate Adherence to Best Practices for Fiduciary Advisors?”
For two reasons: first, even dedicated independent fiduciary advisers can get a bit lax about some of the details of delivering fiduciary advice. (SEC onsite RIA audits often address these details.)
Second, with the proliferation of brokers acting as part-time client fiduciaries under their BDs’ RIAs (or their own), study after study has found a growing confusion among retail investors about their relationships with their financial advisors. These “Self Assessments” appear to be a first step toward establishing a body of documentation that would enable investors themselves to better understand the legal responsibilities of their advisors.