It is Wall Street. And this choking fog grows even denser each time Wall Street opens its mouth to bemoan the fiduciary standard.
Wall Street's Hollow Warnings.
One need not look far to catch this foul odor. Here's one example from a recent InvestmentNews article, quoting a lawyer who "cautioned that applying a fiduciary duty to brokers who sell IRAs could force them out of the market and leave investors without guidance" and who stated:
“We’re not trying to tilt the playing field,” said Kent Mason, a partner at Davis & Harman LLP. “The objective is to provide the best information possible so that participants can make the best decision. But if there is fiduciary liability associated with the provision of information to participants, that information will dry up, which is exactly the opposite of what the GAO is recommending.”
Mark Schoeff, Jr., "GAO: Workers hurt when rolling over 401(k) plans to IRAs" (InvestmentNews, April 3, 2013).
Hmmm ... Wall Street, through its hired gun, states that its objective is to "provide the best information possible." Yet, that can't be done if one is required to act in the best interests of the client, as the fiduciary standard requires? What in the fiduciary standard prevents providing the "best information possible"? - Nothing. In fact, the fiduciary standard ensures that the client receives the best information possible!
Perhaps what Wall Street really wants to continue to provide is "the best information" to plan participants, in the sense of "the best information for Wall Street's interests."
The foregoing threat is similar to Wall Street's repeated warnings that applying the fiduciary standard would leave small investors without the ability to access advice. Yet, similar to the foregoing statement, there is no credible evidence to back up such a position. In fact, as is observed below, the reverse is true - more and better advice will result.
At times I say to myself, "Self - if Wall Street were to carry out its threat, and not adapt its business practices to the fiduciary standard, but rather flee the scene, such would be a good thing ... certainly better than the harm Wall Street causes now in its fleecing of the small investor."
But, I suspect the answer is not that Wall Street will abandon individual investors. If forced to adhere to the fiduciary standard, its business practices will adapt.
What is Wall Street really stating? Wall Street whining really comes down to this: "We can't fleece small investors if a fiduciary standard is applied." Stated differently, "Our business model is only highly profitable for us if we can push proprietary, expensive products and other wares under the weak 'suitability' standard, which permits us to recommend the highest-cost products for our client, even if our clients are substantially disadvantaged by same. We love the financial services sector extracting 35% or more of the profits of this country. We love our bonuses. Don't disturb our greedy practices!"
Wall Street's whining and attempts at obfuscation also ignore fundamental economic principles. In 1970, Nobel-Prize winning economist George A. Akerloff, in his classic thesis, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug., 1970) demonstrated how in situations of asymmetric information (where the seller has information about product quality unavailable to the buyer, such as is nearly always the case in the complex world of investments), "dishonest dealings tend to drive honest dealings out of the market." As George Akerloff explained: “[T]he presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.” Akerloff at p. 495.
In other words, as long as Wall Street is able to siphon excessive rents from investors, through conflict-ridden sales practices resulting in higher costs for individual investors (and lower returns), the business model Wall Street seeks to preserve will continue to attract bad actors. It's only human nature ... "join our firm and your compensation potential is virtually unlimited" is Wall Street's "promise" - ignoring of course the requirement that the new employee is required to sell - not only expensive and often proprietary investment products, but indeed his or her very soul.
Enhanced Standards of Conduct Will Fuel Demand, Supply and Quality.
At a conference I am currently attending (RISE 2013, an investment conference at the University of Dayton), speakers noted yesterday that the reputation of financial advisors is almost as low as that of members of Congress - and both of these reputations fall below that of used car salesmen. This needs to change.
I am surrounded by nearly a thousand students as I write this, all looking to enter the arena of financial services. And not one I have heard speak, in session after session, and in the halls during informal conversations, wants a job selling expensive financial products. Rather, they want to work in a professional environment, where they can help (rather than hurt) their fellow Americans. These students want to be the stewards of their clients' wealth, and of their clients' dreams.
So - what will happen if the fiduciary standard is applied to the delivery of advice to all plan sponsors, plan participants, and individual investors, through potential DOL (EBSA) and SEC rule-making? Economic principles and common-sense logic indicate that three dramatic developments will occur.
First, once individual investors know that they can trust the words coming out of the mouths of their financial advisors, the demand for financial advice will soar. Currently far too many individuals distrust Wall Street, and - given their inability to discern between high-quality, fiduciary advisors and low-quality, non-fiduciary advisors, they simply choose to stay away from both. Additionally, the adverse smell of the non-fiduciary advisors infects the entire landscape of financial advisors.
Second, we will see a surge in the availability (supply) of fiduciary-bound financial and investment advice. More and more actors will be attracted to become such fiduciary advisors. As many, many already have, they will be attracted to a true profession in which they sit on the same side of the table as the client and assist the client in achieving their hopes and dreams. They receive not just professional compensation from providing expert, trusted advice, but they also receive the immense joy from assisting their fellow man.
Third, the quality and quantity of advice will also soar. Currently Wall Street's legions are primarily "asset gatherers" and product salesperson. Much of the training provided is on how to sell - i.e., to close the deal. Fiduciary financial advisors, on the other hand, bound by fiduciary standards, are required to exercise due care in all aspects of the advice they provide. Clients will receive better budgeting advice, increased levels of savings, and better investment advice.
I can hear those on Wall Street bemoan such logic ... "Surely, you jest," they would say. "No advisor can afford to serve small clients, without selling expensive products to them!"
Yet I ask, what is the compensation paid on a Class A mutual fund, for a client who has $20,000 to invest? 5.75%, plus a small (0.25% or less, typically) trailing 12b-1 fee (in theory, in perpetuity) - in addition to fund management and administrative fees and transaction costs. So a Wall Street firm (and its representative) would receive a $1,150 sales load, plus more over time?
The fact is, there are many financial advisors out there right now who will provide advice for $1,150 - or far less. This advice will be provided under hourly-based compensation or for a flat fee or under some other form of professional-level compensation arrangement. And the advice provided won't be just relating to the sale of an expensive product; rather for the same or lower fees paid by the client the professional fiduciary advisors will provide the clients with better financial advice and investment advice, and far more comprehensive advice at that.
Let fiduciary advisors be paid at professional-level compensation, for truly expert advice in the client's best interest. Wall Street may be unable to extract enough rents to survive, under the fiduciary standard, but there are plenty of independent, objective, trusted professionals who will take Wall Street's place, and do a far better job for the individual investor in the process.
We Need the Fiduciary Standard.
We need the fiduciary standard to be applied to all investment advisory activities. Why?
- To create a new era of demand for financial services, from a public which, for the first time, can place trust in financial and investment advisers who are united in their observance of the fiduciary principle.
- To meet the demand for financial planners over time via both existing advisors who transition to a new profession, as well as tens of thousands of new financial planners who will desire to become members of this true profession.
- To enable more extensive and better financial and investment advice to be provided, thereby enabling the financial and retirement security of our fellow Americans.
- To create a true profession, bound together by the fiduciary principle that our client's best interests are, and always shall be, paramount to those of our own (and that of our firms).
The time for Wall Street's dinosaurs is over; their extinction event has arrived. For the good of advisors, the clients, and our country, we need to move on to a new, more client-centric era of professional investment advice delivered under a bona fide fiduciary standard.
Do not permit Wall Street to continue to pollute the air. Do not permit Wall Street to continue to stink things up. Speak up and clear away the dense fog Wall Street seeks to perpetuate.