Views on improving the integrity of global capital markets
04 January 2017

Don’t Junk the DOL Fiduciary Rule

Posted In: Fiduciary Duty

Editor’s Note: This post was originally published by Pensions & Investments on 14 December 2016.

President-elect Donald Trump has pledged to do away with many government regulations, particularly those affecting the financial sector. Industry participants and observers already are writing obituaries for the Department of Labor’s new fiduciary rule in anticipation of its imminent demise.

Rolling back the rule would be a mistake. There are certainly elements of the rule that should be changed, such as the confusion and complexity created by the “best interest contract exemption” and the excessive compliance costs to accommodate all business models and compensation schemes. Our bottom line is that the investment industry needs to place clients’ interests above all else. Ultimately, the responsibility to establish one standard for all investment advice resides with the US Securities and Exchange Commission. But an imperfect fiduciary rule is better than no rule.

Beyond Debate

Regardless of one’s view of the Labor Department’s version of the rule, the need for it is beyond debate. The Obama White House estimated that retirement plan participants are paying $17 billion annually, which is more than is reasonable because of conflicted advice. Although some may debate the accuracy of that estimate, participants must somehow recover whatever amount they are overpaying to their advisers — and that usually means through other government programs, such as Social Security. Regardless of the amount participants are paying for conflicted advice, the response from both sides of the aisle — and from the industry — should be that this state of affairs isn’t acceptable.

It’s no secret that investment advice is rife with conflicts of interest, short-term thinking, and confusing fee structures — all of which put participants, the people whose hard-earned money we’re supposed to manage, at an inherent disadvantage. In the past decade alone, millions of dollars have been lost to adviser malfeasance — billions when the likes of Bernie Madoff of Madoff Securities LLC and Allen Stanford of Stanford Financial Group are included in the calculation. It’s no wonder that the industry has issues with investor trust.

The 2016 Edelman Trust Barometer — the 16th annual global survey of general and college-educated people conducted 13 October–16 November 2015, and commissioned by Daniel J. Edelman Inc., a New York global communications marketing firm — found that just 51% of the US respondents believe the financial services industry can be trusted to do the right thing. The finding that financial services ranks in the bottom tier of trust versus other industries adds a resounding exclamation point. We must avoid engaging in activities that will make matters worse and instead conduct our business in a manner that will improve investor trust. By burying our heads in the sand, we face the kind of massive technological disintermediation that has plagued so many other industries.

One Profession, One Standard

So, there’s a long way to go before investors can feel that their advisers and managers truly have their best interests at heart.

Putting investors first has been the anthem of CFA® charterholders since the first charter was granted in 1963. Charterholders must adhere to a strict code of ethics and standards of professional conduct, which include the obligation to conduct oneself with the duty of loyalty, prudence, and care — the underlying principles of fiduciary duty — regardless of whether one works in a fiduciary capacity.

But although charterholders are bound by a fiduciary standard when giving investment advice, the industry as a whole isn’t. In our view, it should be. Everyone engaged in providing investment advice — whether for retirement and whether as an investment adviser or financial adviser — should be required to adhere to the same fiduciary standard of care. One profession, one standard.

True professions exist to serve customers and to help them achieve their desired outcomes. We can’t claim to be a profession until we’re willing to place our clients’ interests above our own and avoid conflicts of interest when we can — and carefully manage and disclose the conflicts that we can’t avoid. We must publicly distinguish those who embrace fiduciary responsibility from those who merely acknowledge it or want to play word games to justify a middle ground. To that end, those who don’t want to play by the fiduciary rules of the Investment Advisers Act should be required to call themselves salespeople. Professions need to have clear boundaries, and a clear distinction in titles is an important step in setting those boundaries.

It’s unclear whether the DOL’s fiduciary rule will play a role in setting those boundaries given a series of hurdles it must overcome before final adoption. First, the incoming Trump administration has notified executive branch agencies to halt all pending Obama administration regulations to give the Trump appointees time to determine whether to stop the implementation of many of them, including the fiduciary rule. And Congress is likely to take a gimlet-eyed view of the rule. By proposing steps to repeal the DOL’s rule in the pending Financial Choice Act, introduced 9 September 2016, the House of Representatives has made clear that it doesn’t want the DOL to take the lead in addressing fiduciary duties in investment management.

Finally, the court system is reviewing the rule in a number of suits filed nationwide. It wouldn’t be surprising if one or more of the three branches should decide against the rule, thus putting formal implementation in jeopardy. At the same time, however, inertia within the industry suggests a de facto, informal adoption of the DOL’s rule, as indicated by the number of broker/dealers who have already migrated their customers to fee-based accounts.

Time to Do What’s Right

So, it is anything but certain whether the DOL rule faces demise or implementation. What we do know is that the rule’s purpose — to raise the standards for investment advice — isn’t going away anytime soon. Let’s get busy focusing on making the rule better.

We in the investment industry need to do the right thing and put our clients’ interests ahead of our own. It’s unfortunate that we even need a rule to enforce what should be an enduring pillar of any profession. But given the urgency of change needed to win back the public’s trust and respect, we’re all for it.

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Image Credit: ©Getty Images/Wesley Martinez Da Costa/EyeEm

About the Author(s)
John Bowman, CFA

John Bowman, CFA, is former managing director, Americas, at CFA Institute. He also served as managing director and co-lead of education at CFA Institute. Prior to joining CFA Institute, Bowman was a fund manager and equity analyst for Mellon Growth Advisors and State Street Global Advisors. He holds a BS in business administration from the University of Mary Washington.

2 thoughts on “Don’t Junk the DOL Fiduciary Rule”

  1. Kate Elder says:

    It should be easy to find an overwhelming majority that agree with your premise that we should all put our clients interest first. Whether you believe this or not, MOST folks already do. The decision on how one gets paid does not equate to a person’s moral or ethical standards.

    Here is my challenge to you.

    Find even a plurality of people in this business who feel THIS version of a fiduciary standard is the proper approach.

    This rule doesn’t address client interests, it is about how much an advisor/planner/whatever makes or how they make it. That is it.

    You say “don’t scrap the rule”, then complain about the BICE and the costs to monitor the BICE.

    The BICE…IS the DOL fiduciary rule. You really can’t be against the BICE and FOR the DOL rule.

    1. The CFA Institute definitely has the moral high ground here. Any fool can plainly see: “If you don’t put clients interests above your own, you are simply NOT giving them advice”. Let the law call you a wolf, a broker, or an annuities peddler, but for God’s sake, not a financial advisor! Words matter.

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