Update on the Fiduciary Rule

At a time when political rhetoric surrounding Congress inserting itself into the fiduciary debate has muddied the waters for consumers of financial advice, Joshua Brown’s The Most Horrendous Lie on Wall Street presents the truth. The author of Backstage Wall Street, Brown begins his article, “There’s a Blog.2016.03.14 Integrity Rockhorrendous lie being told by the brokerage industry and its army of lobbying groups. It goes something like this: ‘Middle-class Americans are not worth serving if we can’t charge them egregious fees and sell them products that they do not need.’”

Describing how the brokerage industry’s business model is “rife with conflicts,” Brown writes, “In other industries, higher-priced products are typically superior in both quality and efficacy–think luxury watches and cars, or the difference between a roadside motel and the Ritz-Carlton. With financial services products, however, it works in exactly the opposite way. Virtually every single piece of academic research ever produced on the topic says that the less you pay for an investment product, and the simpler it is, the better off you’ll be over the long-term. . . Unfortunately, the brokerage business is predicated on selling the higher cost solutions because that’s where the profit margins are. The incentives paid by fund companies to brokerage firm sales forces across the country are a cancer that must be rooted out. This built-in conflict between advisor and client is partially responsible for the nation’s looming retirement crisis. It also plays a role in the finance industry’s almost universally negative perception among Americans.”

The good news, of course, is that the Department of Labor (DOL) has taken it upon itself to forge a path for how the industry can do better. Its proposed Fiduciary Rule would take the place of the weaker “Suitability Standard” and force brokers to act as non-conflicted fiduciary advisors when helping investors with their retirement accounts. Although many in Congress don’t support the DOL’s Fiduciary Rule, Brown, notes “Any normal person with a functioning brain would agree that this is obviously the way things should work. . . The notion that an investor needs to pay upfront fees of in excess of 5% to buy an A-share mutual fund from a broker is laughable to anyone with even a passing familiarity with the modern-day options that exist.”

Along with Brown, I encourage the brokerage industry to “admit that there are other ways to accomplish something we all want–a healthy and thriving retirement system that offers acceptable choices for Americans of all walks of life.” I believe that a fiduciary standard can work for all financial advisors and their clients just as it does in my practice. In fact, as Brown points, out since 2013 retail brokerage commissions for the sale of investment products have been extinct in the United Kingdom. And although the familiar suspects warned the change would reduce the availability of financial advice for millions of investors, the feared “guidance gap” has not materialized.

The bottom line is that as an investor, you deserve nothing less than working with a fiduciary who will always put your interests first. It’s my hope that the industry will evolve as Brown concludes it will: “Technological innovation and the relentless force of American capitalism will find a way to improve the state of financial advice profitably, just as it always does.”

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