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Regulation and Compliance > Federal Regulation > DOL

Proposed: The DOL Fiduciary Standard Is Unworkable

By Bob Clark

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While I’ve never been able to fully embrace the Libertarian party platform, some of its positions do make sense to me. Case in point is their notion that government regulation often does more harm than good, since it creates an illusion of oversight and safety while many regulations are poorly enforced, when they are enforced at all. And while the new DOL rules seem to me to be a step forward, my many years of covering the regulation of the financial services industry has served to strengthen my general belief in this skepticism.

I sensed that I had found a kindred spirit in this regard as I read a comment posted by David F. Sterling on ProducersWeb.com to my July 28 blog for ThinkAdvisor, The SEC Investor Advocate’s View Askew: The Illusion of Fee Disclosure.

In that blog, I’d suggested that an SEC comparison of the ‘costs’ of commission and fee advice, without considering the relative client benefits of each business model, would only tell half the story. To make sure I’d interpreted Sterling’s comments correctly, I gave him a call in his office in Sarasota, Florida. The advisor and securities attorney’s knowledgeable and articulate elaboration on his comments made a very compelling case for more thoughtful approach to a fiduciary standard for advisors.

Here’s what he wrote, in part: “The time is long past due for those who promote and write about the ‘best interest standard’ to place their observations and conclusions in context. For example, that one can be held to a higher standard of care does not, ipso facto, ensure that the expertise and services rendered are commensurate with that standard.”

To me this sounded a lot like the securities industry’s mantra of “there are no guarantees of sound financial advice,” which in logical theory we call a ‘straw man’ argument. But that wasn’t Sterling’s point at all. Instead, he was suggesting that both the DOL fiduciary rule and the ’40 Act fiduciary standard set a bar that very few RIAs and financial planners can meet today. 

“In my book,” he said, “CFPs are nothing more than jacks of all trades and masters of none. They’re holding themselves out based on the curriculum of the CFP coursework. But are they really expert enough to be ‘fiduciaries’ in all those areas: insurance, taxes, estate planning, portfolio management, etc.? Can they really talk knowledgeably about the advantages of one type of insurance versus another? And what about the layering of fees in some of those investment portfolios?”

Sterling’s point here is that being a fiduciary is more than acting in what one “thinks” is the client’s best interest: an advisor is required to “know” what is in the clients’ best interest, in every area in which he/she holds him/herself out to be an expert. “Are they really qualified to see what is ‘foreseeable?’ for example, Sterling wondered. “For fiduciaries,” he said, “errors of omission are greater than errors of commission.”

And finally, Sterling is concerned that the current fiduciary standards—both DOL and ’40 Act—lack remedies that are within the reach of most investors. “Under these standards, an advisor has the legal duty to do X. But in order to enforce X, that means the client has to engage in legal proceedings, which are onerous undertakings. And will attorneys really take these cases? Not unless there are enough zeros to take it on contingency. Otherwise, the investor will have to write a check.” He sees the DOL rule’s deterrent effect as minimal, saying it’s “a rule with an enforcement protocol that has next to nothing to enforce compliance.”

While Sterling believes that a “workable” fiduciary standard for advisors would do more good than harm, he is concerned the current models will fall short of that mark.

“I’m in agreement with the motivation behind the fiduciary standard,” he said. “But the way it’s been rolled out by the DOL, and the functionality components, have problems. I just don’t think we’ve really thought this through. The financial industry is ill equipped to grasp what it means to be under a fiduciary standard. What’s needed is a fiduciary rule that is a fusion of both current client service models: brokerage and RIAs. To get there, we need to pull back the reins a bit and ask ourselves if we really understand what we’re talking about here.”

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