I recently received the following email from an advisor who is clearly upset about the Department of Labor’s fiduciary rule and came up with some creative ways to express it. They are interesting arguments that, at least to my mind, cry out for further exploration.
Him: Just know no one knows what [a client’s] best interest is or can know. … it’s not a Vanguard Index Fund either … and … the [fiduciary] rule was sold in part by saying that doctors operate under a standard. But they sure as heck do not receive reasonable compensation with salaries in the $300,000s. How a hospital figures out a way to charge $3,000 for a broken arm is a real mystery to me. That’s as non-fiduciary as it gets. Remember equity abhors a windfall. … the real fact is that very few of us will be able to conform to an unworkable rule.
Me: Thanks for the email. You make some interesting, and often novel, points, but I have to respectfully disagree on virtually every one of them. Is it really your argument that a top-producing broker can make $1 million a year (and often much more) selling securities, but a doctor who saves peoples’ lives or fixes their broken bodies so they can once again lead normal lives is overpaid at $300,000? (And by the way, a good chunk of that $3,000 for a broken arm is going toward malpractice insurance).
More importantly, neither an “advisor’s total comp” nor a doctor’s total comp are fiduciary issues, anyway. They key question is: What did they, or other types of advisors, do to make their incomes? And the issue is providing financial/investment advice to retail clients about the products and strategies most likely to help them achieve their financial goals at the lowest price. Because the cost of financial “products” has a major impact on portfolio outcomes many years into the future, lower costs are often in a client’s best interest.
And certainly I agree with you that the “lowest cost” product isn’t always in a client’s best interest. In those cases, the advisor needs to be able to rationally defend their higher-cost recommendation — and if the advisor and/or their firm (or any affiliate) is receiving compensation in any form, for recommending the higher cost product, rather than a lower cost product, additional scrutiny is clearly warranted.
To my mind, these financial conflicts of interest represent the greatest threat to fiduciary, client-centered advice. They can create huge incentives to recommend one product over another, regardless of the client’s best interest. Conversely, if a broker and their firm receive the same level of compensation whether the client buys an ETF or a 150-basis-point mutual fund, then more leeway should be given for the advisor’s rational (but it still has to be a good reason).