The New Fiduciary Rule

The Labor Department’s new fiduciary rule is an implicit endorsement of the business model we follow in serving our clients everyday – to act in their best individual and unique interests. While lofty in its proposal, the ultimate DOL rule will fall short of sweeping change for the financial services industry, due primarily to the efforts of the lobbying and political weight of Wall Street, banks, and insurers. The new rule for now, is focused solely on retirement services like 401ks and IRAs.

Ideally, the fiduciary standard eliminates all conflicts of interest between clients and their representatives. But in the practical world and with this new rule, the fiduciary standard for the financial industry winds up being more focused on disclosure of conflicts of interest: In short, the powerful industry is simply not willing to give up the huge profits that compound on their currently conflicted course. Here’s a good WSJ article on What Exactly is a Fiduciary?  Also, Forbes magazine offers a chart explaining the components of the new rule and the industry complaints for each.

In truth, we deal with conflicts of interest each and every day. For instance, industry-specific media is biased toward the industry it represents. Don’t expect to see an article lambasting low-fee passive indexes in Investment Advisor Magazine, given that Vanguard (the leader in low-cost passive index investing) is a major advertiser in that magazine. Similarly, national news outlets, at least in the editors’ and producers’ offices, carefully weigh the cost of lost advertising dollars when airing/reporting less-than-complimentary stories on major sponsors. It almost certainly impacts their reporting almost daily.

When we walk onto a car lot to invest thousands of hard-earned dollars in a new or used car, we know that we are going to be dealing with someone who is solely motivated to sell us a vehicle from his lot. We know the salesman is held to a standard of disclosing any material defects in any automobile he shows us. We know he will do all he can to make us understand that his is the best offering to best suit our needs. But what if this is the last day of the month and he as only one more car to sell to increase his bonus by three thousand dollars?

There’s nothing inherently wrong with his getting a bonus for selling so many cars. He might even let us know we are the sale that pushes him over. But what if in the process he fails to tell us that the candy apple red version of our new convertible will actually be available on the lot tomorrow, the first day of the new month – one day too late for his bonus? In this case, the salesman’s self interest would directly impose on our best interest – a specific interest/ideal we clearly informed him of. He satisfied the level of suitability to which he was held by regulators by selling us a suitable automobile. But he failed us miserably as a fiduciary, by placing his self-interest in his bonus ahead of the color car we ideally wanted. While this example may seem a little silly, consider the same dynamic applied to your life’s savings.

Since the early days of the twentieth century, financial services have largely been sold to the public in the form of mutual funds, individual stocks, municipal bonds, collateralized mortgage obligations, limited partnerships and so on. Brokers, Banks, and Insurance Companies spend huge amounts of time and money to: assemble the assets into a package, hire the lawyers  to create the 250,000-word, 8-point type prospectuses, pay marketing teams and printers to create beautiful sales collateral, to train ‘wholesalers’ or field experts to go out to train and equip the thousands of brokers, agents, and consumer sales reps all over the country, who will ultimately sell the products to their customers. And then there’s the huge budget–perhaps tens of, if not hundreds of thousands of dollars–for entertainment and incentive trips designed to motivate broad sales of their products.

How many potential conflicts of interest lie hidden in the complicated matrix above? Want to know what the leading industry complaints were against the DOL’s fiduciary rule? It was ‘regulatory burden’ – translated simply to mean higher costs which reduce profits. Translated further, into complete transparency, it means less wealth coming from your pockets as consumers of 401ks and other retirement plans.

When anyone sells you a financial ‘product,’ it is almost certain that most of the conversation will be about that product. There are thousands of well-intentioned brokers, insurance agents, and bank reps out there who want to do the best for their customers/clients. But the very nature of the sales transaction and the volume required by that model of compensation argues against the level of understanding and wisdom required in a fiduciary relationship. Without a complete financial picture of your values, priorities, tolerance for risk and uncertainty, as well as the current probability of your meeting or exceeding every goal you value, it is impossible to determine an optimal choice.

Fortunately, quality fiduciary advisors exist, but we are not as plentiful as the television ads would have you believe. It is incumbent on you to determine whether your advisor understands you thoroughly, is sufficiently equipped to provide optimal advice for your unique circumstances, closely monitors your progress, and has no conflicts of interest that materially diminish your very best interests. A true fiduciary relationship goes beyond the concepts of trust and loyalty. Neither of these ideals speaks directly to subjugating one’s self interest to the interests of another.