Advisors who truly aspire to be part of a respected profession need to oppose the furious efforts to revive the commission-broker ethos from the top seat of government

February 9, 2017 — 10:39 PM UTC by Guest Columnist Scott MacKillop

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Brooke's Note: California surfers can tell you. If a shark menaces, there are two things you'd best not do: freeze like a piece of inert fish food or make madly for the shore like an injured seal. You might, however, want to make for the beach in deliberate fashion. Scott MacKillop senses that most RIAs are living by another mindset when it comes to the shark attack on the DOL rule. Keep surfing knowing that, chances are, some other floating protein will get chomped down. But he wonders aloud whether we are seeing this particuar shark's full pattern behavior -- or just how much RIAs look like a brokerage seal from their swimmers-eye view.

Years ago I was scuba diving with my family when a 15-foot tiger shark appeared out of nowhere and swam in lazy circles around us for what seemed like hours before deciding we were not a worthy meal and soundlessly disappearing into the deep. The time is now for the investment industry to shed its shameless culture or pay a steep price

The sharks circling around the DOL fiduciary rule appear hungrier and more determined than the one we encountered.

On Feb. 3, President Donald Trump officially joined the conversation about the Department of Labor’s fiduciary rule. Up to that point, many people, both in and out of government, had lined up in opposition to the rule, but none had the authority to stop its implementation.

The president has now set events in motion that could have a profoundly negative effect not only on American retirement plan participants, including IRA investors who are also covered by the rule, but also on financial advisors—even those who are already required to act as fiduciaries. See: How Trump's backtrack on DOL rule burned his most ardent anti-rule supporters and the opening Elizabeth Warren is exploiting.

Last Friday, Trump directed the Secretary of Labor to review the rule “to determine whether it may adversely affect the ability of Americans to gain access to retirement information and financial advice.” A worthy directive. Who can argue with access to information and advice? See: Trump's lightning-quick backtrack on executive order relating to DOL rule sows chaos in financial advice industry.

He further explained his directive by noting that “one of the priorities of my Administration is to empower Americans to make their own financial decisions, to facilitate their ability to save for retirement and build the individual wealth necessary to afford typical lifetime expenses…”

Most financial advisors, particularly those already subject to fiduciary obligations under the Investment Advisers Act of 1940, are satisfied to let this storm take its own course. The thinking is that heads I win, tails I win.

In the case where the rule survives, I am already largely positioned to live under its mandates while competitors scramble to tell a new story and have clients sign papers giving them permission to continue with some dubious practices.

If the rule dies, I'm good, too. The status quo has put me at the top of the food chain and the free market will likely keep me there.

Lumped into one

Gary Cohn: The rule is 'like putting only health food on the menu because unhealthy food tastes good.'

My take is that RIAs will also be significantly harmed if implementation of the DOL fiduciary rule is derailed. RIAs may see themselves as sitting above the fray, but they are not. They may even see their fiduciary status as a marketing advantage—a solid basis for differentiating themselves from those subject to the lower suitability standard. See: RIAs and B-Ds don't mix, says Duane Thompson at MarketCounsel Summit 2011.

But that is small thinking. The public is hopelessly confused. Most people have no clue what a fiduciary is or how a fiduciary differs from a member of the suitability crowd. They will never read the DOL rule and wouldn’t understand it if they did. That is why the rule’s opponents can brazenly say things about it that are blatant falsehoods. See: Where RIABiz's view of RIAs as oases-of-ethics bumps up against the Merrill Lynch & Co. mirage -- and why that mirage is still so effective.

The public sees us all as being members of the same club. If we aspire to be a true profession, if we want to be viewed with respect rather than derision, then we all need to get behind measures -- like the DOL’s fiduciary rule -- that raise the standards applicable to the entire industry. We need to do what is right for all clients, not just our own. We truly need to put the interests of investors first -- not just in our offices but on the larger legislative playing field. 

Don't eat it -- it's good for you!

It's easy for advisors to get as confused as the consumer. Certainly empowering Americans, facilitating their ability to save and helping them build wealth are all good things, right? Of course. The president just wants to help the hardworking people who are trying to provide for themselves and their families in retirement.

Gary Cohn, newly appointed White House National Economic Council director and former president and chief operating officer of Goldman Sachs, confirmed this fact. He told the Wall Street Journal the rule is “bad for consumers.” He later expanded on that view by stating that he doesn’t “think you protect investors by limiting choices. You need to give them the proper sources to accumulate wealth.”

Rep. Ann Wagner: it’s been a labor of love for me for four years.

In supporting his “limiting choice” comment he inaccurately observed that the rule requires an advisor to recommend the lowest-cost product even if it is not in the client’s best interest. To make his point crystal clear he said that the rule “is like putting only health food on the menu because unhealthy food tastes good. But you still shouldn’t eat it because you might die younger.” 

Anthony Scaramucci, another member of Trump’s inner circle (at least so it was thought until recently), used an even more striking metaphor to explain the administration’s opposition to the DOL rule. He stated that the rule discriminated against advisors in a manner that evoked, at least for Scaramucci, the Supreme Court’s Dred Scott decision holding that African Americans weren’t U.S. citizens. Anything that bad must be stomped out so he promised, “We’re going to repeal it.” 

Lacking the metaphorical flourish of Cohn and Scaramucci, Rep. Ann Wagner, R-Mo., dealt her cards straight off the top of the deck. Standing at Trump’s side as he signed the directive, she said, “What we’re doing is returning control to the American people, lower and middle income investors and retirees, control over their own retirement savings. It’s about Main Street and it’s been a labor of love for me for four years. It’s a big moment for Americans.”

Trump added: “She means that so much.”

Protecting their own bottom line since 1912

Wagner's straight-from-the-heart comments made the hair on the back of my neck stand right up, like Old Glory being run up a flag pole on top of a purple mountain majesty, overlooking amber waves of grain. I imagine that her three largest campaign contributors—the insurance industry, the securities industry and the commercial banking industry—felt much the same way.

I know that Thomas Donohue, CEO of the U.S. Chamber of Commerce, felt the same way. Donohue expressed his approval of Trump’s action by pointing out that the rule “would have made it more difficult for Americans to save for their futures.” He was particularly concerned that the “flawed fiduciary rule’s rushed implementation would have jeopardized access to retirement advice and choice” for retirement plan participants. See: See: The time is now for the investment industry to shed its shameless culture or pay a steep price.

Most right-thinking people would agree that six years simply isn’t enough time to adequately consider the fine points of a rule of such importance to hardworking Americans. Certainly the Chamber’s real constituents, the employers of these hardworking Americans, would probably love to keep the debate going for another decade or so in order to avoid disrupting their status quo, and the Chamber would be delighted to do so on their behalf. As the Chamber’s website says: “Since 1912, we’ve been fighting for your business and looking out for your bottom line.”

I’m sure Joe Wilson, R-S.C., also breathed a sigh of relief on behalf of all retirement plan participants. Wilson had previously introduced legislation to delay the rule by two years because, as he put it, “Rather than making retirement advice and financial stability more accessible for American families, they have disrupted the client-fiduciary relationship, increased costs and limited access.”

Now he won’t have to duke it out with the forces of evil on Capitol Hill in order to protect hardworking Americans. The president is taking care of that.

Billions and billions of conflicted advice

Indeed, with so many concerned people in high places it’s hard to know why we needed a fiduciary rule in the first place. These folks obviously hold the fate of American retirement plan participants close to their hearts and will fight like tigers (certainly not sharks) for them when the need arises. See: Mum on DOL rule, Labor chief appointee Andy Puzder's 'check-the-box' 401(k) plan at CKE Restaurants speaks volumes.

Thomas Donohue: The rule 'would have made it more difficult for Americans to save for their futures.'

But, once you sort through the metaphorical mishmash and the red-white-and-blue rhetoric, you may recall that the rule was designed for the sole purpose of cloaking retirement plan participants with the protection of a fiduciary standard and requiring that their interests be placed before those of brokers and other financial advisors who might serve them. This was made necessary by the fact that, according to the White House Council of Economic Advisors, investors lose approximately $17 billion every year to conflicted advice in retirement accounts.  See: The DOL's final rule contains a litany of 11th hour concessions to brokers that show Wall Street lobbyists earned their keep.

Yes, the rule restricts choice in the same way that laws against burglary restrict the choices a burglar has about how he is going to spend his time. Cohn is right. Few people want to open a menu and see only tofu and alfalfa sprouts. But the rule doesn’t do that. It leaves all the good tasting stuff on the menu, while eliminating dishes made with rancid ingredients or food that is past its expiration date.

High-fives all around

Yes, the rule is “flawed” in the sense that it is longer than many books and is highly complex, even by regulatory standards. But it’s that way for a reason. The DOL could have simply applied the basic fiduciary standard that has been a part of ERISA since its enactment to all brokers and advisors who service retirement plans and their participants. This would have imposed a high standard of behavior and resulted in a rule that was less than one page in length. But it would have caused significant disruption to the financial services industry. So the DOL embarked on a six-year journey to find a compromise that dealt with the concerns of the industry. Now, like the boy who kills his parents and then throws himself on the mercy of the court because he is an orphan, the industry complains about the rule’s flaws and complexity. See: The DOL's final rule contains a litany of 11th hour concessions to brokers that show Wall Street lobbyists earned their keep.

A new president has the right to advance his own agenda and dismantle any laws or regulations he chooses, as long as he follows the prescribed legal procedures. But neither he, nor any others, should lie about their motives for doing so. On the same day he signed his DOL directive, Trump signed another one that commenced the dismantling of Dodd-Frank. He then met with a room full of the titans of the financial services industry. One can only imagine how many high-fives and attaboys were exchanged. This is definitely not about Main Street.

Gutting the fiduciary rule does not advance the interests of American retirement plan participants. It advances the interests of the large financial services firms that have been profiting at their expense to the tune of $17 billion annually. It’s shameful to claim that you are protecting hardworking Americans when, in fact, you are denying them the simple right to have their interests put before those who advise them about their financial future.

Scott MacKillop is CEO of First Ascent Asset Management, a Denver-based firm that provides investment management services to financial advisors and their clients. He is a 40-year veteran of the financial services industry. He can be reached at scott@firstascentam.com.



Share your thoughts and opinions with the author or other readers.

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Jim Heard said:

February 9, 2017 — 11:29 PM UTC

I suspect this comment may unleash the fury of those whose intent I understand but whose efforts I fear are misdirected. For the benefit of full disclosure, I am CEO of a $1 billion RIA firm, and I take the fiduciary rule and its purpose seriously. It is one of the main reasons I chose to make the change from the wirehouse world to the fee-only world many years ago. However, the fiduciary rule was a career choice I made. It was not forced upon me. But let me cut to the chase. 1) If fiduciary advisors need a rule, regulation, or designation to separate themselves from other non-fiduciary advisors/brokers, we have a bigger problem than the recent attack on the DOL-rule. If consumers can't tell the difference, then WE are the problem. Beyond that, the regulation that works for us today is likely to be before the one tomorrow that could put us out of business, or controls how we price our services, or, ...well, you know the rest of the story. And 2) there are many ways consumers make bad choices - they buy inferior and dangerous cars, they smoke cigarettes, they eat bad food, they indulge in dangerous behavior. This is the dark side of human behavior in a free society, but this is also how markets work. And who says consumers need a rule to protect them from themselves? The fiduciary delivery model is the only one growing market share today and for the last 15 years. Let the markets work. Consumers understand the difference. I know a few of the investing public would be better off having this rule or something similar. But I also know the vast majority of investors and the fiduciary model will be much better off without it. If you want to save the world from itself, get more clients.
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brooke southall said:

February 10, 2017 — 6:09 AM UTC

Jim, I hear your thoughts and they are logically and historically based. Still, I imagine if you step onto an airliner, into an emergency room, or into a courtroom to defend a crime you didn't commit, it is reassuring to know that regulations are in place that make it a matter of law that those professionals put you first. Having rules in place doesn't mean market forces cease to function and remain the arbiter of success. Rules generally make the market work better and faster. It's fine to talk about the market sorting out iPhones vs. Galaxies but do you want it perfecting itself with your life -- or nest egg -- as the practice dummy? Brooke
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Phillip Christenson said:

February 10, 2017 — 1:41 PM UTC

Jim, aptly put. The reasons you cited are exactly why I am against the DOL rule. Not only that but with all legislation there are unintended consequences and negative externalities, of which cannot be seen without a crystal ball but bear out over time to the detriment to the consumer and the "real" fiduciaries like you who are trying to serve them. For the record, I am also a fee only advisor.
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Scott MacKillop said:

February 10, 2017 — 2:25 PM UTC

I'm normally a free-market guy myself, but in this case the historical record shows that market forces haven't worked. Studies show that most clients don't know the difference between a broker and a fiduciary adviser and they can't tell a bond from a bon-bon. They need guidance, which is why RIAs play such a crucial role. There is no reason why those who purport to offer advice should not be subject to a fiduciary standard. Product-seller can still exist, but should be clearly labeled as such. This is not just for the investor's benefit. As I said, RIAs pay a price for the confusion, and we will all pay a big price down the road when retirees don't have enough money to support themselves because they have been ripped off by conflicted advice. We should all hope they have as much money as possible in their accounts when they hit retirement age.
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Phillip Christenson said:

February 10, 2017 — 2:57 PM UTC

They haven't worked or they haven't worked in the way you expected? Or maybe change is not as timely as you like? Either way a majority of my clients are people who were questioning the "advice" they were receiving from a broker dealer and learned about fee-only/fiduciary from researching, so yes people are learning the difference. If the DOL rule was only about labeling a broker as a "product-seller" I might be able to get behind it but it is much more than that. And I agree that the majority of people need guidance but how far should the law go? And who decides what is best if not the free market? I propose a law to force mandatory annual meetings with pre-selected fiduciary advisors...can you already see the potential for corruption/cronyism. Or maybe a mandatory 12.4% should be taken from our paychecks and wisely invested...oh wait, we already have social security and that is working out just as planned... I enjoyed reading your article and thanks for the discussion.
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Scott MacKillop said:

February 10, 2017 — 5:35 PM UTC

It has nothing to do with my desires or expectations. The Investment Advisers Act of 1940 established the distinction between brokers and advisors before you or I were even born. The Supreme Court read a fiduciary standard into that Act in 1962--55 years ago. The vast majority of people still don't understand the distinction. Most of the investors who are affected by the DOL rule wouldn't be able to meet the minimum account size requirements of most RIAs, but there is no reason that they should not be protected by the same fiduciary standards your clients are protected by. Yes, the rule is a messy blob, but it is that way because the industry would not accept a simple fiduciary standard like the one RIAs have lived with for over 75 years. Let's clean up the mess by simply applying the standard to all people who offer financial advice. Simple, clean, done.
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Grant Barger said:

February 18, 2017 — 3:06 PM UTC

Love Jim's perspective... The wrong sides are rooting for or against the industry rule. Which makes perfect sense if you've been in this industry for any amount of time. You can't police advisors into becoming stewards... The industry will sweep its own doorstep for the benefit of self preservation... not client or stakeholder concerns. Articles like this are important to report on the facts... Advisors should never rely on industry standards to define their value for them. Jim and Brooke will both have their perspectives played out through different players in the same game. This is one of the reasons financial services is the greatest business in the world... it will fix itself eventually, and digital transparency is speeding the process exponentially. Great article and great comments by all.

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