Fiduciary Rule: The Real Agenda

08-17-2015There’s a powerful agenda behind the opposition to the rule proposed by the U.S. Department of Labor (DOL) requiring that advisors to retirement plans be fiduciaries: The securities industry wants to preserve its ability to give conflicted advice.

There’s a lot at stake.

Background Information

Fiduciaries are required to put the interests of their clients first. All conflicts must be resolved in the client’s favor.

Every registered investment advisor (RIA) is required by law to be a fiduciary. Brokers and insurance companies are not. As long as the recommendations they make are “suitable,” they can advise their clients to invest in higher-cost — and often higher-commission — investment vehicles.

I have never understood why retirement plan participants or individual investors would rely on anyone who didn’t agree, in writing, to place their interests first. I suspect it’s because most investors don’t understand the difference between the fiduciary and suitability standards. Brokers and insurance companies are not likely to educate them.

A Fiduciary Pledge

Here’s a simple way to test whether the advice you are getting is conflicted. Ask your RIA, broker or insurance agent to sign this basic fiduciary pledge. If they refuse to sign it, the advice you’re receiving may be conflicted. If you continue to do business with that individual, you do so at your peril.

Fiduciary Pledge

1. I will use my best efforts to act in good faith, with candor and always in your best interest.

2. I will proactively provide you with written disclosure prior to my engagement, and thereafter throughout the term of my engagement, of any conflicts of interest that will or reasonably may be considered to compromise my impartiality or independence.

Signed this _____ day of ______

Any RIA should be willing to sign this pledge. Most brokers and insurance agents will likely refuse to do so.

The Cost of Conflicted Advice

Providing conflicted advice — without disclosing the conflict — is big business. The securities industry is not about to give up the prospect of fattening its coffers at your expense without a fight. Its weapon of choice is the legislative lobby. By funneling vast amounts of money into these efforts, it hopes to influence members of Congress to block the DOL rule.

How profitable is the business of providing conflicted advice? Very.

One study examined data from the Oregon University system to determine the impact that brokers had on the choices participants in its defined contribution retirement plan made in their portfolios. The results were disturbing.

The study found that participants who relied on conflicted advice from brokers paid more in fees than participants who managed their own portfolios and underperformed self-directed participants by 1.54 percent annually. The authors of the study noted that their findings “highlight the agency conflict that can arise when unsophisticated investors seek investment advice from financial intermediaries.”

These findings are consistent with those of another recent study, which sought to discover why brokers recommend actively managed funds that “provide the same bundle of portfolio management and advice as broker-sold index funds, but earn significantly lower after-fee returns.” The authors conclude the most likely answer is “an agency conflict between brokers and their clients.”

Providing conflicted advice is both prevalent and lucrative. It also harms investors when their advisors recommend underperforming actively managed funds instead of lower-cost index funds with higher expected returns. By some estimates, the cost to investors in actively managed funds is a staggering $80 billion a year.

The Takeaway

Don’t believe the protestations of anti-fiduciary advocates that the proposed DOL fiduciary rule is “unworkable.” Implementation of this enlightened rule would stop the wasteful transfer of your hard-earned money from your pocket into that of your broker. The self-interest of the securities industry lies at the heart of its opposition to the rule. Your self-interest should motivate you to support it.

This commentary originally appeared July 7 on

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