“We never like to do anything on a Friday — especially a summer Friday,” famed advisor Barry Ritholtz quipped during a Wednesday phone interview with ThinkAdvisor to discussed the Friday effective date of the Department of Labor’s fiduciary rule.
A supporter of the rule, Ritholtz — chief investment officer of Ritholtz Wealth Management, a guest commentator on Bloomberg Television, host of the popular Bloomberg Podcast Masters in Business as well as a Bloomberg View columnist — readily admits, however, that the rule isn’t perfect.
As former CEO and director of equity research at FusionIQ, a quantitative research firm, Ritholtz is no stranger to both sides of the Street, but he’s basking in fiduciary fervor. “Having been through the suitability side, brokerage rules, compliance, [the Financaial Industry Regulatory Authority] and all that messy craziness, this [fiduciary realm] is delightful,” he said.
“There’s no ambiguity, there’s no gray. There’s no giant compliance machinery as a practitioner. Anytime a question comes up: ‘Hey, is this in the best interest of the client?’ No. Then we don’t do it. Yes. Ok, then it’s an option.”
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Ritholtz, who also pens The Big Picture blog , shared his views with ThinkAdvisor about the rule, the political willpower at the SEC to finally push through a fiduciary rule of its own, and also what he views as broker-dealers’ “forgotten role.” Following is an edited version of our conversation:
THINKADVISOR: As a practitioner in the industry, what do you think about the rule going into effect?
BARRY RITHOLTZ: There are multiple aspects of this [rule] that are interesting. The first being, my firm, Ritholtz Wealth Management, is a registered investment advisor. We embrace the fiduciary rule.
When people say that [the fiduciary rule is] expensive and complicated, it’s not that they’re wrong, they don’t know what they’re talking about. If you’ve been on both sides of the Street, the machinery to make sure rules of suitability are followed appropriately and enforced is massive. It is massive. I have friends at Morgan Stanley and UBS and Merrill Lynch and other big firms — they get random emails from people in compliance saying: ‘You said such and such in this email.’ So if you’re trying to thread the needle, [the brokerage side is] much more complicated than what’s a clean, black and white question: ‘Is this in the best interest of the client or not?’
From a client’s perspective, of course they want fiduciary, and in fact the surveys seem to continuously show that clients think that their brokers and non-fiduciaries are fiduciaries because of all the titles they have — investment advisor, investment counselor.
Someone had suggested a simple way of cleaning up the rules was making sure the titles weren’t ambiguous — allowing either: you’re an investment advisor with the term fiduciary on the business card or on the business card, you’re a broker and this is not a fiduciary relationship.
You could eliminate a lot of regulation just by eliminating that confusion from the end investors’ minds.
By the way, I’m not naïve. I know why so many people object to the fiduciary rule: It cuts into their cost structure. It’s not a coincidence that when the secretary of Labor’s op-ed in The Wall Street Journal came out [recently], you saw brokerage firms take a little bit of a dip and you saw the insurance companies that sell a lot of annuities that certainly aren’t in the clients’ best interest — those stocks took a big whack. So the bottom line is: The objections that we’ve seen raised mostly have to do with how much the advisor can get paid.
Are you in favor of the rule as currently drafted? Opponents of the rule, along with some advisors, have said they’ve seen instances of clients’ being pushed into higher cost advisory relationships because of the rule.
I haven’t seen that at all. … This relates back to the big firms. We’ve seen Merrill Lynch and Morgan Stanley and Wells Fargo and others tell their entire staff of brokers and advisors, ‘We will not pay you on accounts under $250,000.’ So when they say that to people, think about the average IRA or 401(k), you’re eliminating 90% of the accounts out there by telling people, ‘I’m not going to pay you on these accounts.’
Now, if they have $1 million elsewhere, and there’s a $200,000 401(k), then Merrill Lynch will pay the advisor — by telling them they’re not going to pay them, they’re saying: ‘We don’t want these accounts.’
So long before the fiduciary rule was promulgated, people on the big firm brokerage side were moving away from small accounts. I’m sure there are a handful of situations where it can be said, in this situation, here’s a person who had a relationship and for whatever reason the broker has decided that it wasn’t worth taking on the additional liability from a fiduciary relationship. I’ve got to think those are few and far between.
The reality is, if someone doesn’t want your account because they don’t want the fiduciary liability, I’m imagining what they’re saying is: The fee structure doesn’t work for the broker anymore; the whole thinking underlying the $17 billion in fees [argument justifying the fiduciary rule] was to drive the cost structure lower. So if they’re sending people to robo-advisors or automated advisors or lower cost advisors, that’s the entire point. It’s not that people are losing access to advice, they’re losing access to expensive advice. I think that’s a key difference. The point [of Labor’s fiduciary rule] was to make this a less desirable line of business for expensive advisors.
You think that has worked, the way the rule is currently drafted?