Note: The latter portion of this article was previously published by WealthManagement.com as "Does a Fiduciary Dystopia Await Industry" (Sept. 4, 2015). The first half of this article presents the alternate vision not found in the original article.
It’s 2025. Nearly a decade has passed after the 75th Anniversary of the Investment Advisers Act and the U.S. Department of Labor’s enactment of its “Conflict of Interest” rule. As I overlooked Western Kentucky University’s Centennial Mall, I saw some of my 300 financial planning students participating in the fall festivities.
Nearly all of my students had already secured positions in residency programs starting in the following Spring or Summer. The U.S. economy, boosted by continued innovation in materials science, the health sciences, robotics, and information technology, was booming. And no longer did excessive finalization drag down U.S. economic growth by 2% a year, as the IMF had concluded in its research paper written a decade earlier.
Indeed, capital was accumulating in record amounts, as Americans saved much more for their future financial needs. Instead of a high level of rent extraction by Wall Street and the insurance companies, much more reasonable fees were being paid for expert, professional financial advice.
The DOL’s rule was implemented in 2016, followed on by a strong application of the fiduciary standard by the U.S. Securities & Exchange Commission (SEC) in early 2018. How did this occur? For the first time in decades a strong SEC Chair was appointed. Strong fiduciary standards of conduct were imposed upon all of the financial and investment advisory activities of brokers.
Under the new DOL and SEC standards, conflicts of interest were required to be avoided wherever possible. This recognized that disclosures – while important – were largely ineffective consumer protections where such vast information asymmetry existed. For conflicts of interest that were not avoided, the courts carefully scrutinized these arrangements by applying the common law requirement of affirmative informed consent. Even then, the courts opined, the transaction proposed by the fiduciary must be substantively fair to the client. For, as many a jurist had opined over the past decade, no client would ever provide informed consent to be harmed by his or her adviser.
Reversing a series of ill-advised decisions and rulemaking by lack of enforcment, the SEC prohibited waivers and disclaimers of core fiduciary duties, a practice often seen in 2015 by dually registered RIAs (despite the anti-waiver provisions of Section 215 of the Advisers Act). The Commission also put an end to 12b-1 fees (“advisory fees in drag” and “special compensation”) as anti-competitive (as they could not be negotiated by clients) and as unreasonable compensation (such as when 12b-1 fees continued, even though advice was no longer provided). Other reasons, including lack of consumer understanding of 12b-1 fees and their impact, also led to their demise.
High-frequency trading, which extracted hundreds of millions of dollars (or more) each year from the capital markets, was effectively quashed by new fees on short-term traders. Payment for order flow was banned, leading to true “best execution” of securities trades. The SEC subjected all principal trades to the new standards first promulgated by the DOL, leading to fair pricing and outlawing the dumping of unwanted securities. Payment for shelf space and other forms of “revenue-sharing” paid to brokers were banned as contrary to the fiduciary principle, under which level compensation arrangements were required to be agreed to in advance of specific investment recommendations.
The SEC also finally acknowledged that it really didn’t want to supervise RIAs, given the SEC’s more critical role in the oversight of more major aspects of the capital markets. FINRA, which had publicly opposed DOL's imposition of fiduciary standards in mid-2015, and in so doing revealed its true nature as an instrument of Wall Street’s sales culture, had its jurisdiction over market conduct activities removed by an Act of Congress. In its place federal legislation sanctioned new state professional regulatory associations (PROs), to which all those who provided financial planning and investment advice were required to belong. Working hand-in-hand with state securities and state insurance regulators, these new PROs empowered much more sensible regulatory regimes.
Very frequent surprise inspections for custody by state securities administrators occurred, given the government’s essential role to ensure the safety of clients’ funds. Ponzi schemes still arose, but they were less frequent and never as severe as those seen in the early years of the 21st Century. Multi-million or even multi-billion dollar Ponzi schemes were now a thing of the past.
Rules applying costly annual risk assessments and other activities were repealed. Periodic examinations of investment advisory firms, other than to verify assets and examine custody arrangements, were no longer undertaken. Only very infrequent for-cause examinations were conducted, usually on the rare complaint of a client or former employee of an RIA firm. Serious complaints received were, following an initial investigation, vetted by a peer review panel of each state-run PRO to determine if probable cause existed, and decisions by administrative law judges were subject to appeal to peer review panels formed in each state. RIAs and financial planners conducted their own voluntary peer reviews of practices, in 2 to 5 year cycles, but the primary purpose of these reviews was to enhance quality rather than to punish. The entire profession benefitted as quality expectations were increased to ever-higher levels.
The Certified Financial Planner Board of Standards, Inc. morphed to become the national standards-setting body to which all of the PROs subscribed; these standards were made applicable nationally by the Act of Congress. New “Rules of Professional Conduct” (R.P.C.) were adopted by the CFP Board. These retained the principles-based approach of the fiduciary standard. Onerous rules that did little but fuel jobs for examiners and compliance personnel were repealed. No longer were those providing investment advice and financial planning treated as criminals; investment advisors and financial planners were instead treated as true professionals.
The FPA, NAPFA, IAA, the AICPA’s PFP division, and the CFA Institute all merged into a single professional association. Separate divisions supported the many different career tracks in the new professional services firms, but efficiencies still resulted from more streamlined continuing education requirements (now 60 hours every two years, for all financial and investment advisers).
As the securities industry moved away from sales-customer relationships to fiduciary-client relationships, RIAs saw an influx of business in the 2-3 years following the DOL’s and SEC’s rulemaking. Some of the older product purveyors left the business rather than adapt to the fiduciary requirements. As was the case in the U.K., about 10% to 15% of the "sales force" in financial services retired or left the industry.
And, as the years went by, the influx of new business continued to occur - as Americans’ trust of financial and investment advisers rose to new heights. Demand for financial and investment advice soared. And Americans, armed with expert advice in their best interests, saved more and invested much more wisely.
The insurance industry shrank precipitously. Sales of cash value life insurance for temporary needs were no longer taken, and term insurance with conversion privileges became the standard of practice. Cash value life insurance was sold only when the insurance need was permanent in nature.
Life insurers also shrank as sales of the expensive forms of variable annuities and equity-indexed annuities plummeted. The old VA contracts, which with riders often had annual fees of 4% or higher, failed cost-benefit analysis.
Sales of expensive EIA contracts - the ones with 7%, 10%, and higher surrender fees - also fell. New, far less expensive annuity products emerged and were embraced by RIAs, but only after surviving the extensive and expert due diligence fiduciary advisers were known to undertake.
More RIAs also learned, as they grew their expertise, to replicate the EIA strategy of investing in fixed income investments and using interest income to purchase options on indices, thereby participating in the upside potential of the market to a larger degree with no downside risk. The strategy gained in popularity and was utilized for a subset of clients, or a portion of a client's portfolio.
Wall Street’s large broker-dealer firms, dinosaurs whom attempted to hold onto their business models through ill-fated legal challenges to the new fiduciary rules, nearly collapsed. Their sales-driven business model was extinct.
Without the sales force to hype IPOs, new investment banking structures were created. IPOs were now handled by newly formed syndicates of independent advisory firms; investment banking fees were more than halved. As each RIA did its due diligence, IPO’s were priced better under the enhanced scrutiny they were given by expert investment advisers, leading to more efficient capital formation and the allocation of capital.
Individual advisors migrated to professional services firms of various sizes. Career paths emerged, starting with internships, moving into residency programs, associate status, junior partners, and senior partners. Senior partners were highly compensated – not because they sold a great deal of expensive products – but rather because the residents and associates provided revenues which exceeded their associated salaries, benefits, and other supporting expenditures. The business model of investment advisory firms quickly became similar to the business model of other professional services firms, such as law and accounting firms.
New state laws were adopted negating non-compete and anti-solicitation provisions previously found in investment adviser employment contracts. Instead, when a professional left a firm the client could choose who to follow; the adviser or firm who retained the client paid the other party a portion of advisory fees received over the next several years. This more accurately reflected the reality that firms and individual advisers jointly contributed to the engagement and maintenance of client relationships.
The 300 graduates of Western Kentucky University’s B.S. Finance / Financial Planning Program in 2015 were in high demand, with recruitment of them by professional firms from around the country. Other baccalaureate programs blossomed. All of the financial planning programs provided more in-depth instruction using extensive case studies, pursuant to new educational standards promulgated by the CFP Board. The CFP Board’s exam was modified to reflect more case-intensive exam questions. Certificate programs also now required 10 courses, instead of just 6, to meet the new, higher educational requirements.
Then I awoke from my dream.
Looking around, I realized I had awoken in my hotel room in Washington, D.C. It was still 2025, the 85th Anniversary of the ill-fated Investment Advisers Act. As I arose to prepare for yet another visit to policy makers to lobby for what we now called a “bona fide fiduciary standard,” I reflected on the actual events of the past decade.
The DOL’s “Conflict of Interest” rule was finalized, but over time the “Best Interests Contract Exemption” (BICE) was interpreted in such a fashion as to render its fiduciary protections meaningless. In large part this was because FINRA’s arbitration system controlled the dispute resolution process. In 2018 FINRA had gained oversight of RIAs, after lobbying Congress for many years.
A new Administration had also lead to changes in personnel at the DOL and SEC, leading to new rules providing particular exceptions to the fiduciary requirements imposed by the DOL’s “Conflict of Interest” rule. Under pressure from many dual registrant firms, waivers of core fiduciary duties by clients were now common under BICE (despite the fact that no informed, intelligent, knowledgeable client would ever sign such a waiver). Disclosure was deemed to be the only requirement to mitigate a conflict of interest. BICE’s disclosure requirements were simplified from detailed explanations of fees, costs and compensation to the standard mandated disclosure, buried in the fine print of Form ADV, that “Our interests may not be aligned with yours” and “We may receive additional compensation as a result of our recommendations to you.”
In addition to mandatory arbitration in broker-dealer and RIA contracts, insurance agent contracts with customers to which BICE was applied also mandated FINRA arbitration. This is because FINRA’s leadership had effectively instructed FINRA’s arbitrators to ignore fiduciary requirements and to do, what in the arbitrators’ mind, was “equitable.” FINRA’s arbitrators refused to examine claims of “unreasonable compensation” under BICE, arguing that customers should be free to agree to whatever they desired to pay. Of course, FINRA’s arbitrators were largely pro-securities industry and pro-insurance industry, as many had industry ties and all wanted to keep their jobs as arbitrators. No written determinations of facts were required, and very few grounds existed for the appeal of arbitration decisions. Even clearly erroneous arbitration decisions were rarely appealed.
FINRA, the gargantuan gorillas now overseeing nearly all of financial services, brought pressure on the CFP Board to re-set the standards of conduct for CFP Certificants to a very low level. All of the many various industry associations remained, and even a few more had emerged. But any influence these fragmented organizations may have once had, even through the forming of coalitions, was diminished by the outsized influence FINRA possessed at the other government agencies and in Congress.
The large Wall Street firms and insurance companies continued to dominate financial services. Wall Street’s broker-dealer firms retained enough market share to possess a sales force that was able to hype IPOs; this continued Wall Street’s ability to justify its highly profitable investment banking fees.
The movement to lower-cost investment providers, such as “robo-advisors,” stalled. The low fee structures resulted in low levels of profitability, even for those few that managed to acquire scale. The initial providers of capital desired to exit from their private equity investments, leading to the sale of many of the robo-advisors to Wall Street firms and insurance companies, which quickly subsumed them. The few robo-advisors that remained morphed their business models to sell proprietary and higher-fee products, and to obtain profits by spreads on the investment of mandatory cash allocations.
American consumers, continuing to read of ongoing scandals emerging as a result of the sales culture that so dominated Wall Street’s large firms, shied away from seeking out any financial advice. Even fee-only RIAs continued to remain relatively small, as a percentage of the advisory industry, given the much higher compensation offered from business models built around product sales and the huge marketing budgets of Wall Street firms – driven by the sales of expensive products.
Worse yet, another financial crisis had emerged. Without the scrutiny of an army of expert purchasers’ representatives, Wall Street manufactured and sold to unsuspecting consumers a new form of asset-backed securities, which turned out to be junk. Fortunes were lost, and counter-party risk rose to high levels, prompting another freeze in the credit markets. The Federal Reserve struggled this time to provide the liquidity needed. The world economy sat on the edge of a precipice.
The American economy had never really recovered from the First Great Recession, as it was now called. The returns of the capital markets continued to be largely diverted through excessive fees and costs, stalling the growth of the American economy compared to that of emerging markets countries. The excessive annual diversion of the returns of the capital markets away from investors and to Wall Street exacerbated the low amount of personal capital accumulation by U.S. citizens. As the problem of a low supply of capital compounded over time, the cost of capital increased, further weakening the growth of business and the U.S. and world economy. Worse, over the past decade nearly all of the Baby Boomers had retired, and most were ill-prepared to meet their financial needs during retirement.
Despite the greater needs of its growing elderly population, the federal government sought to cut its budget under threat of another debt downgrade by the credit rating agencies, and due to “Greece-like” pressure from the United States’ major creditors (including China). Existing benefit programs were being cut, including Medicare and Social Security, placing further financial strains on retirees.
Some states responded by raising their own taxes as core services for the elderly were strained. Even Florida, with its huge population of retirees, raised its sales and property taxes as it sought to address their growing needs. However, Florida’s tax revenues remained dismal as the tourist industry collapsed during the Second Great Depression. Also, property valuations continued to fall in most of Florida’s major cities as flooding at high tides – apparent in Miami a decade ago – spread to other coastal communities. Sea rise led to downgrades of the debt of most coastal municipalities, making it even harder to raise capital for much-needed infrastructure improvements.
Nearly all of the insurance companies abandoned property insurance for coastal homes and businesses, leading the emergence of state-run, extraordinarily expensive insurance pools. Commercial and home mortgage defaults had become common, in part due to the inability of owners to afford insurance premiums. Banks were increasingly stuck with real estate properties they could not sell, except at very low prices. Many banks’ capital, already stressed by the failure of the new asset-backed securities, fell to new lows; the FDIC was again busy arranging bank liquidations, but few buyers of fallen banks emerged.
My thoughts turned to my students, as they did often during these difficult times. We had intentionally kept Western Kentucky University’s Financial Planning Program’s enrollment low, so as to graduate no greater than 75 students a year. Our desire was to see all of our graduates land positions with firms in which they were actually doing comprehensive financial planning. But given the Second Great Recession, even those jobs had disappeared. Here in 2025, many of our graduates were taking jobs selling insurance, annuities, and costly financial products; they had no choice.
I left my hotel room to once again battle with Wall Street on Capitol Hill and in the halls of government agencies. Of course, neither I nor the other advocates who continue to desire a true profession of financial and investment advisors, or who represented consumer interests, possess much of a chance of getting bona fide fiduciary standards imposed.
Big money controlled the recent Presidential elections, in every respect, and all of the new Presidential appointments were anti-consumer. The 2024 elections saw big money finally get behind a candidate who was trained by her professional handlers to say just the right things to win both the Republican nomination and the general election. Of course, the name recognition didn’t hurt the election chances of President Alexandria Lincoln Bush-Reagan, either.
I strolled out from my hotel and flagged a taxi, en route to another meeting at the SEC. Twenty years had passed since I first engaged in these efforts to educate policy makers about the importance of a bona fide, enforceable fiduciary standard. Today, 85 years after the enactment of the Investment Advisers Act, I observed that the emergence of a true profession of investment advisers, who eschewed conflicts of interest and embraced the delivery of expert investment and financial advice, remained largely a dream of the drafters of the Advisers Act. It would likely remain a dream of theirs, and of mine, for many decades to come.