The Fiduciary Rule and the Titanic
104 years ago today, the Titanic sank. I was reading a fascinating story this morning in Our Daily Bread about one of the passengers who died in that tragedy. He was a journalist named W. T. Stead, and voluntarily gave up his own life vest and spot in a life boat so that someone else could be rescued. Ironically, he had published articles about the need for more lifeboats on passenger vessels. 
You may be wondering what the Titanic has to do with the Department of Labor’s Fiduciary rule, which was just released last Wednesday. The premise is to force financial advisors to put their client’s interests ahead of their own when it comes to retirement plans and IRAs. I can’t think of a better example of how the rule should work than what W.T. Stead did on April 15, 1912.
Fortunately however, the investments we choose, while important, are not life or death propositions. Therefore, the choices aren’t a cut and dried as some folks would like to make them appear.
In case you’re wondering, I am a fiduciary. First, I’m a Certified Financial Planner, and second, I’m a registered investment advisor. Both require me to put my client’s interests ahead of my own. You’d think I’d be jumping up and down for joy like my fellow fiduciary colleagues that perhaps the playing field may be leveled a little. But I find myself a little confused by what the fiduciary rule is going to do.
To me, it’s kind of like the Affordable Care Act. Nancy Pelosi said that Congress would have to pass it in order to find out what was in it. We have to see what’s in the Fiduciary Rule.
I see at least 3 possibilities. One is unfavorable, one is favorable, and one is worthless.
To illustrate these scenarios, I’m going to use and example from the automotive industry.
Recommending the right investment is a little like recommending the right vehicle. Let’s say I’m a car salesman, and a family of four comes into my showroom. They explain they are looking to purchase a new family vehicle. To me, they have at least four options:
- A sedan
- A minivan
- A mid-sized SUV
- Or even a 4 door pickup truck
- The Unfavorable Possibility
There’s a lot of talk about the fiduciary rule favoring the lowest cost investment as being the best option for investors. So in this case, 100 percent of buyers that I sell a car to should be leaving in the sedan. The sedan probably has the lowest sticker price, and gets the best gas mileage. That’s ridiculous, you say. Many folks would take exception to the sedan being in the best interest of every buyer. Frankly, I’m one of them.
One of the reasons why this rule came about in the first place was to correct the abuse of variable annuities. Now, I’m no fan of variable annuities. I haven’t sold one since the earliest days of my career. But I just met with a client who bought one from her former advisor. It is now free of surrender charges and I walked her through the pros and cons of moving it to an advisory account. Yes, it has outrageous fees of more than four percent annually. But, it gives her a guaranteed income for life, much more efficiently than any bond ladder I can create. Yes, most of that income is just a return of her investment, but I have a feeling she is going to live much longer than a normal life expectancy. In the end, it gives her peace of mind. There are many people who find variable annuities attractive for these reasons, and they aren’t all just financial neophytes or greedy salesmen (retirement professor Moshe Milevsky comes to mind). You can’t just say that one investment fits everyone. If this is what the fiduciary rule will eventually end up being, then I’m against it.
- The Favorable Possibility
I’ve never been a car salesman. But if I was, here’s how I would handle the situation above. First off, I would try to learn as much about the family as possible: their background, their goals, and their financial position. Then, I’d list the options above, and describe the advantages, disadvantages, and costs of each. I’d ask them if they have any questions, and which way they are leaning. I’d then give them my professional recommendation, and let them make the final decision. If this is what the fiduciary rule is going to look like, then I’m all for it.
- The Worthless Possibility
I’m also reading that the rule requires advisors to act as fiduciaries. BUT, the client can sign a document called a “best interest contact exemption” which effectively allows the advisor to NOT act in the client’s best interest. Who would be so foolish as to sign such a document, you ask? A lot of people, actually.
First, think about how many disclaimers we all have to sign every day. We sign them at the bank, the doctor’s office, at work, and certainly at our financial advisor’s office as well. The fiduciary rule could just be one more that is added to the stack.
Second, who knows what the advisor is going to tell the client to get them to sign it. Let’s face it, whether or not an advisor is going to act in their client’s best interest ultimately comes down to their own moral compass, not some law. I act in what I believe to be in my client’s best interests not just because I’m a CFP and a registered investment advisor. I do it because I genuinely want what’s best for my clients and because my profession isn’t just a job, it’s my calling. I believe my financial expertise is talent given to me by God, and the way I use it is my gift back to Him.
Which possibility is most likely? Based on what I’m reading, and on history of other such financial legislation, the third is probably most realistic.
I hope I’m wrong. I would love to see a day when all advisors talk with clients about all their options so that the clients can decide what’s best for them.