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Show Me the Money: Taking the Fiduciary Debate to the Bottom Line

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I’ve had a couple of notable comments to my July 14 blog: “Is the Fiduciary Standard Really a Political Issue?

The strength of the first remark comes mainly from the fact that the author, Elliot Weir of III Financial, agrees with me: “Well said, Bob. Too many non-political issues have been sucked up into the vortex of party ideology!”

The second comment is a much lengthier viewpoint emailed to me by an advisor who wished to remain anonymous. While he disagrees with me on virtually every point, he raises a number of interesting issues that are worthy of discussion.

Here are the highlights:

Him: “Fiduciary is without a doubt political. I don’t know what a ‘political issue’ is, but I’ll define it as any issue that the left wants government to solve, and the right knows the market solves better… at least those are the talking points. Starting with the assumption there is a problem that the market isn’t solving today in the most efficient way is, by the above definition, political.”

Me: As I’ve written before, while it doesn’t mean one is “right,” I do believe the thinness of critics’ arguments is an indication that one is on the right track. In this case, we’re looking at the old “free markets” defense. Heck, even Adam Smith believed in some regulation, famously saying; “Above all, regulation should be sensible.”

I think most people would agree that the least regulation is best, when it’s sensible not to regulate. But, I also think our society has pretty clear guidelines about when it’s more sensible to regulate.

One of those times is when professional advice is involved.

Higher Standard

We hold professionals to a higher standard because their knowledge and experience puts them at a distinct advantage over their clients (or patients), in areas that can have a profound impact on their lives.

Professionals are prohibited from providing “advice” for their own gain, at the expense of their clients’ well-being. And the reason this makes sense is that “free markets” don’t work well in areas where one party has a substantial informational advantage over the other party.

The issue of professional responsibility is clearly not a political issue. Nor, I think, is the notion that financial advice can play just as large a roll in people’s lives and happiness as does our health or our tax returns. Consequently, it is not an area in which “free market” conditions exist.

Perhaps the real problem here is that we don’t have regulations requiring that both professional investment/financial advisers and non-professional financial advisors to clearly communicate to their clients which category they belong in.

Him: While I don’t believe entirely in unintended consequences, most who support a fiduciary duty are very aware of the damage they are doing to the accessibility of personal financial advice.”

Me: It’s curious to me how opponents of the fiduciary standard want to play both sides of the “financial advice” card.

Technically, to give financial/investment “advice” you need to be Registered Investment Adviser. The only exception is the “broker loophole.” By this I mean the ‘broker exemption” to the ’40 Act, which allows unregistered “advisors” to give investment advice that it “usual and incidental” to the sale of a security.

This is clearly a mistake in the law; and one so important that some 10 years ago, the brokerage industry attempted to expand this “exemption” to include “advice” when managing client portfolios for a fee. Fortunately for investors, they failed.

The point here is that in most cases, providing financial or investment “advice” requires one to be a fiduciary and act in the best interest of their clients. And the brokerage industry has gone to great lengths to argue that brokers are not providing financial advice.

So, how is it that a fiduciary rule could limit access to the “personal financial advice” that advisors aren’t providing? And if they are providing advice, then they are already fiduciaries.

Him: “I personally think it would be nice to see pushes for regulations that actually expand a consumer’s access to advice, rather than less and trumpeting its benefits, rather than being concerned about minor costs.”

Me: And here’s the final brick in the wall: costs. For “costs” are what the fiduciary debate is really about.

Part of acting in a client’s best interest is that the adviser must consider the “cost” of the recommended investments.

And as we all know, all those fees, and expenses, and loads over many years, have a substantial impact on investors’ portfolios. Yet the financial services industry would have investors believe they are just “minor costs.” Nothing to see here; just keep moving…

What’s more, in what other profession would we buy an argument that putting the clients’/patients’ interest first would cost too much?

Can you imagine doctors proposing that if you just let us perform a few unnecessary operations every month or take kickbacks from drug companies, we could charge a lot less for each operation? Or accountants suggesting that if Uncle Sam would share a small portion of the deductions they don’t recommend, they could do tax returns for free?

Finally, does anyone really believe that Merrill Lynch, with revenues of $14.5 billion in 2016, can’t find a way to make giving advice in the best interest of their clients profitable—when independent RIAs with $1 million in annual revenues do it every day?

The real issue is that it just wouldn’t be as profitable.


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