The DOL Fiduciary Rule: The Wizard of Odds

I’m not a betting man, but if you had asked me six months ago I would have almost put money down that there was going to be industry backlash to the Department of Labor’s Fiduciary Rule released in April of this year. I thought the rule was likely to be challenged in court or perhaps taken directly to Congress in hopes of delaying or overturning it

However, upon reviewing the rule, and the many concessions it made to the financial services industry (read: brokers) I wasn’t nearly as convinced. I stupidly thought the final version was watered down enough where brokers could accept the necessary, and in my opinion fairly modest, concessions. How silly of me that I thought we could all move on and plan for a world where the playing field was a little more even and clients could be a little more certain what they were getting when engaging and advisor.

The fact that so few people were satisfied with the rule in its final state was touted as a sign of the success of the rule and that compromise from all sides was necessary to arrive at this version. You can be forgiven for thinking, as I did, that we were all ready to move forward.

Given an unnecessarily lengthy comment period where all concerns and gripes could, and should, have been sufficiently addressed and which was the basis for compromises and concessions with regard to the stern-ness of the final rule, we are now learning that this watered down version of the rule is still too much for the industry to handle.

During this comment period (which was nothing more than spouting of talking points and posturing with slogans to keep government out of the retirement business), industry insiders (and investors swayed by them) made their desires to forego any additional regulation known. They did so, so loudly in fact, that the final ruling was a mere shadow of its original intent, to the point where I thought the brokerage industry would just accept it and move on as, in my opinion, it should be a modest cost and modest haircut to the brokerage industries already inflated revenue. No such luck.

This rule is a long, long read. I won’t bore you with the minutia, but the central issue of it was designed to better align the advice givers (sometimes called advisors, all too often more accurately thought of as brokers or salespeople in most cases) with the advice receivers (clients, investors, etc.). To get to the heart of the matter we have to peek behind the curtain just a little bit.  

Why did such a ruling need to happen? Let’s take a look at an admittedly insane example: You’ve come down with flu-like symptoms and you go to a doctor for treatment. The doctor introduces himself as a doctor, and is wearing doctor appropriate attire in what appears to be a doctor’s office. There are no red flags. The nurses call this person doctor and he runs some tests after which he writes you a prescription for cough syrup and whatever other medication doctors prescribe for such illnesses (I must admit I have no idea – I don’t see doctors).

Being a cautious sort you go see another doctor for a second opinion – overkill for flu-like symptoms, but better safe than sorry I guess. Everything at this second doctors office is identical to the first except this doctor, after what you think is an equally thorough exam, writes you a prescription for Viagra and Prozac.

Taking this ridiculous example through to the end we can see that the first doctor acts as an advisor would. They are a fiduciary. That is they act in your best interest. They gave you medicine that is arguably the ‘best’ and ‘most appropriate’ for your situation.

The second doctor is a broker. They are only held to the suitability standard. That is they don’t have to work in your best interest. They only have to give you medicine (or advice) that is suitable, not necessarily the best, in their opinion. Will Viagra and Prozac make you feel better – it’s very possible given what these drugs do. Will they specifically address the symptoms and illness you are suffering from – clearly, no.

Most of the industry operates under this second standard. Morgan Stanley, UBS, Merrill Lynch, Wells Fargo. They are all only held to the suitability standard. What’s more is the second doctor gave you those specific medications because he gets paid more by those pharmaceutical firms – it’s the same reason a Morgan Stanley broker seems to always be pushing Morgan Stanley funds. Not only that, did I mention that you are paying premium pricing for Prozac and Viagra when the same thing can be bought cheaper and a generic is available for even less. Well, that’s happening too.

Back from our little sidebar peek behind the curtain, the industry has come together once again to try and screw the very investors it claims would be hurt by this DOL rule. A number of financial industry trade groups (or lobbyists if you prefer) have come together to oppose the DOL ruling. At minimum hoping to get it delayed and possibly overturned entirely. You need to ask yourself, why are they so hell bent on this… profits is the answer.

Here are the industry groups supported by the names above and other firms like them that are the named plaintiffs in the case against the DOL rule:

- Chamber of Commerce of the United States of America,

- Financial Services Institute Inc.,

- Financial Services Roundtable,

- Insured Retirement Institute,

- Securities Industry and Financial Markets Association,

- Great Irving-Las Colinas Chamber of Commerce,

- Humble Area Chamber of Commerce DBA Lake Houston Area Chamber of Commerce,

- Lubbock Chamber of Commerce; and

- Texas Association of Business.

These industry groups are out to support the industry, not the investor. In fact, they are out to support the industry at the expense of the investor.

While, I don’t like government intervention anymore than the next guy, in fact, I like it less probably. The problem is people are not educated/smart/diligent/careful enough to make smart investment choices on their own (this includes picking an investment advisor).

The average Joe couldn’t tell you squat about investing and probably thinks all advisors have to work in his best interest. The average Joe is dead wrong. Given the choice he’d probably go with one of the big brand names in the business, which we’ve already listed, for no other reason than he saw their ads during the game last week.

This is a case where these firms relative size and the lack of an educated consumer has created a system where the better priced, better quality option has not succeeded. The free market failed in this case and short of shutting these firms down, the DOL has decided to bring the standard to which they need to be held up to match that of the advisors in the space. It is not too much to ask. In any other business we’d be appalled that such a dichotomy even exists.

Any argument by the industry that this change will be too costly is pure and utter BS. Will it cost these firms money? Yes. Can they afford it? I would hope so since they spent decades overcharging and making a killing off the very people they purport to help.

I’m not a gambler, but if there were odds on this kind of thing I would definitely bet that the broker/dealer industry is not done – not by a long shot. While the big name firms are wise to keep their noses out of this fight directly, we’re seeing that there is no reason they can’t send in their watchdogs to do the dirty work.

Thus far all signs point to this case being fairly weak, so the expectation is the rule will ultimately stand. More interesting, perhaps, is what’s behind the curtain that they don’t want you to pay attention to. On the one hand these industry giants hold themselves out as protectors of the small investor while simultaneously pulling the strings designed to keep that same investor from profiting in this system. They do so by holding themselves to a lower standard where far too large a percentage of the profits end up going to them, not the investor.

That is a system where we can all agree, the odds are bad.