The Fiduciary Standard: Why do we have to make things so complicated?!
I'm feeling a bit queasy right now.
I just read an online article from Investment News titled "Insurance industry calls on DOL to allow propriety sales, revenue-sharing in fiduciary rule". It's about how the Department of Labor plans to re-propose a rule that would require those who claim to give retirement advice to act as fiduciaries. By "fiduciaries" they mean having to put their clients' best interest first.
To quote from the article:
The DOL first proposed its fiduciary-duty rule in 2010, asserting that a fiduciary relationship is critical in order to protect workers and retirees from conflicted advice as they build their retirement nest eggs on their own through 401(k) plans and individual retirement accounts.
Makes sense, right?
Well, apparently the insurance industry is jumping on the same band-wagon as the financial services industry and claiming that if their "advisors" are subject to a fiduciary standard instead of their current "suitability" standard then the whole financial industry will collapse. (Okay, that last bit of hyperbole is mine, but it's not far off the mark from some comments I've recently read.)
For those who don't already know, a "fiduciary" must make recommendations that are in the client's best interest whereas someone held to the "suitability" standard must only make recommendations that are suitable for the client. For example, if a new college graduate earning $35k/year needs a car it may be suitable to sell him a $60k Mercedes because it will get him from point A to point B. However, a fiduciary would recommend he buy a used Toyota for $10k in order to limit his total debt.
Now, here is why I'm feeling queasy...and a bit angry. Read on from the article:
The agency withdrew the rule after fierce resistance from the financial industry. Opponents said it would drive up liability and regulatory costs for brokers who sell IRAs and force them out of the advice business, leaving investors with modest retirement accounts nowhere to turn. Brokers currently operate under a suitability standard that allows them to sell higher-priced products as long as they fit a client’s needs.
First off...hello! You say there's nowhere the little guy can turn when he needs financial advice other than paying high fees and commissions to salespeople looking at their own bottom lines instead of their clients'? What about fee-only, hourly advisors like myself? I give sound financial advice to clients who have little to no money, but who still want to make good financial choices.
Okay, setting aside the crazy assertion that there are no fiduciary advisors to help the small investor let's get to the meat of the problem and come up with the obvious solution:
Don't call yourself an advisor and we won't hold you to the fiduciary standard!
Salespeople at broker-dealers and insurance companies want to be able to sell their company's products even if they know there are better products available for their clients. To continue with my car analogy, a salesperson at a Toyota dealership wants to be able to sell a Toyota even though they know a Ford would better fit the buyer's needs. I get that. But that's why we call the Toyota salesperson a "Toyota Salesperson". We don't pretend they have scoured the car-buying world and are recommending the best car for their client. We only assume that they've scoured the entire lot and found the most expensive car they think the buyer will purchase. (Sorry, I couldn't resist that last bit of snark.)
So why do we call the people who work at Metlife (or Merrill Lynch or Edward Jones, etc.) and sell their company products "Metlife Advisors". Let's call a spade a spade and call them "Metlife Salespeople". Don't hold them to the fiduciary standard because it is impossible to be a fiduciary while being limited in what you can offer your clients. Be proud, all you salespeople out there! Offer your clients the best products your company offers (or even the products with the highest commission rate)!
Just don't offer advice and don't call yourselves "advisors" and you can keep your suitability standard! We won't hold you to the loftier fiduciary standard.
You see, there's no need to make things so complicated.
