The Fiduciary Rule for financial advisors appears to be on its way out before ever coming into effect. How should we feel about that? Advocates say investors are often abused with unsuitable and expensive investment advice; the investment industry critics say it is a radical change that imposes substantial burdens, reduces their profits and limits investor choices. Who’s right?
The advocates are right:
- Why pay for bad results? History has repeatedly shown, and this blog has celebrated, the spectacularly bad level of expert investment advice that the financial industry makes available, at such high costs.
- Why make the investor #2? Time points out the gross abuses legal in our current system, which only requires advisors recommend things “roughly suitable”, and the deciding factor is often which fund gives the seller a higher commission.
The critics are right:
- High cost burden. The industry’s estimate that it will cost them $5 billion initially and $1 billion a year annually is probably an underestimate. On the other hand, an industry whose experts produce poorer predictions than flipping a coin may not be in a strong position to demand that they keep getting rewarded at their current level for sustained abject failure.
- Reduced profit. As I point out in Who’s on my side? – Part 3 – Fund Managers, there are conflicts of interest between the majority of investment advisors and their clients. This rule would leave more money for the client and less for the broker. For an industry which earns huge returns providing largely below average results, what right do they have to your money?
- Limiting investor choices. I certainly hope so; that’s the goal. Other professions are greatly limited by fiduciary duty. Your lawyers can’t deliberately mount a poor defense if the opposing party offers them a free pizza. Your banker can’t recommend fatal overspending if a bankruptcy lawyer pays him a referral. Your doctor won’t give you anything but his best advice for your life and health.
The advocates are wrong:
- False sense of security: The DOL fiduciary rule contains loopholes that negate much of its needed effect, such as allowing brokerage firms to offer investment advice that is not in the client’s best interest, as long as the firm offers its own poor investment product instead of reselling someone else’s poor product. Worse yet, some fee only advisors are expensive as well. How much do you really have to charge to say, “buy these low cost index funds and hold them?”
The critics are wrong:
- The industry has no inherent right to act against their client’s best interest. If they have to change their business model to take care of the customer, that’s not government oppression, it’s long overdue.
