A Fiduciary Standard May Leave Some Investors Out of Luck

Then there’s the current dispute regarding the Department of Labor’s push for fiduciary standards for advisors servicing smaller 401(k) accounts. A White House Council of Economic Advisors Report charged that commission-based advisors offer their customers “conflicted” advice that “costs middle income families $17 billion per year.”

Translation: Many commission-based brokers are self-serving hucksters and rip-off artists from whom smaller investors need protection.

Investor Interests

While the DOL promises not to prohibit commission business, it’s clear that this is not its preferred business model. These regulators will likely tolerate it for the moment, though.

I guess the DOL regulators weren’t around after the 2008 crash, when many advisors – both commission and fee-based – prevented client from selling their positions at the bottom of the market.

Meanwhile, self-styled “investor advocates” campaign for a stricter fiduciary standard to apply even to advisors servicing smaller accounts.

The predictable result will be the disenfranchisement of smaller investors, as most advisors and their firms conclude that the modest fees garnered from servicing these clients do not justify the heightened potential liability.

These investors will likely find that robo-advisors are their only option. That’s not necessarily a bad thing, but robos are newcomers and don’t yet have a track record in different market environments. 

Furthermore, robo-advisors like Betterment and Wealthfront don’t offer the option of a relationship with a human advisor.

Shouldn’t smaller investors have the option of choosing a trusted advisor? How will this work out during the next downturn? (I guess we’ll all find out.)

This reminds me of the Greek Stoics I learned about in college. They were purists, only interested in the realization of their abstract ideals of justice. They also were oblivious to the effects of their actions on real people, and their motto was “Let justice triumph though the heavens may fall” – i.e., even if mankind is destroyed.

Consumer protection is an important goal; and where there’s money, there are unscrupulous people. The fiduciary standard may bring a higher level of service to some investors, but it may also inadvertently leave many out in the cold.