“The Trump administration’s misguided attack on retirement savers” and other headlines like this one from The Washington Post have investors anxious over the impact our new president’s deregulation efforts might have on their retirement and investment accounts.
What is creating all the news and controversy? A simple question: Should investment advisors be held to the same conflict-free fiduciary standard as those in the healthcare and legal professions? This is actually not a new question. Our grandparents and members of the “Greatest Generation” were still reeling from the effects of the 1929 stock market crash caused by rampant Wall Street speculation which led to a leveraged market bubble. When the bubble burst, there were runs on banks, massive unemployment, and a ten-year long “Great Depression.” Our “Greatest Generation” was fed up with Wall Street, and their wrath was felt in Congress, who in 1940 passed the “Investment Advisors Act.” The legislation was simple and legally required anyone calling themselves an Investment Advisor to be a fiduciary, to act in their client’s best interest, and to only recommend the “best investment available” for their client. This is the same fiduciary standard required of an attorney defending a client or a physician treating a patient. The 1940 law had real teeth; and unlike the legislation today which is subject to intense industry lobbying, there were no “exceptions.” If an advisor didn’t recommend the best investment to their client, they could be hauled into court to defend the investment advice they had given.
American investors enjoyed this protection for decades until a court precedent thirty-eight years later. On December 28, 1978, a judge ruled against a married couple who were suing their “advisor” for not having purchased the best investments for them under the 1940 Investment Advisors Act. Remarkably, the judge ruled that because the couple’s “advisor” had been compensated by his employer (a broker/dealer) and not directly by the couple through a separate investment advisory fee, he was considered just a salesman primarily employed to sell products and not give advice. The judge found that he wasn’t an investment advisor (this was news to the couple) and any investment advice he had given the couple was merely “incidental” and not subject to the fiduciary “best investment” standard required by the 1940 Investment Advisors Act. In the crazy world of Wall Street, what now matters most in determining your advisor’s fiduciary level is who is paying them. If you are paying them directly with a transparent fee for advice, then you’re covered under the higher fiduciary standard. If you are paying them indirectly through the opaque commissions, 12b-1 fees and other “kickbacks” paid out by the Wall Street products and funds that they have sold you on, then you’re in the same boat as the married couple. If you are a physician, can you imagine being able to avoid a malpractice judgment as long as you were paid by a third party (insurance company) and not directly by your patient? If you’re an attorney, imagine being relieved of your fiduciary duty to represent your client’s best interest simply by accepting compensation from opposing counsel or any other vested party, like an insurance company? Is this state of affairs immoral? In my opinion, absolutely! Is it legal? Unfortunately, for today’s investors, yes, it is. It’s the law of the land, and the vast majority of the people you run into selling themselves as investment advisors are actually Wall Street product “peddlers” who have a conflict of interest with you (their client). Yes, this is Wall Street today, and under current laws the wolves are free to roam the country.
This brings us to the current Trump controversy and headlines. After yet another crisis, this time the 2007-2008 Global Financial Crisis, Americans were again fed up with Wall Street and demanding the government take action. This time it was the Department of Labor spearheading the reform, not Congress. The DOL sought to require anyone giving investment advice to any retirement account under their jurisdiction (i.e., any tax advantaged retirement account like an IRA, Roth IRA, or a 401k) to adhere to the old 1940’s “best investment” fiduciary level, and it didn’t matter if they were insurance companies selling annuities or broker dealers selling their own investment products and funds. True to form, Wall Street and the insurance industry waged a brutal, all-out war against the DOL’s fiduciary rule. To their credit, the DOL held true and in 2016 began implementation of the fiduciary rule requiring conflict-free best investment advice to retirement accounts. How did Wall Street and the insurance industry respond? Five separate lawsuits were immediately filed by the National Association for Fixed Annuities, the American Council of Life Insurers, the Indexed Annuity Leadership Council, Financial Services Institute, the Financial Services Roundtable, the Insured Retirement Institute, the Securities Industry and Financial Markets Association. These lawsuits and the industry groups filing them are incredibly revealing…who could be against requiring investment advisors to avoid conflicts of interest with their clients or to require them to always act in the best interest of their clients? The DOL even capitulated somewhat to the industry pressure, and the DOL’s rule still allows “exceptions” to the standard as long as the “advisor” has disclosed their inherent conflict of interest to their client in writing but the lawsuits against the DOL continue.
Wall Street and the insurance industry are infamous for creating opaque and expensive products to sell investors. We’ve all watched Hollywood make entertainment out of tragedies with “The Big Short,” “The Wolf of Wall Street,” “Too Big to Fail,” and “Margin Call.” Yes, Wall Street has made an artform of using language to obfuscate what they are selling and are masters of behavioral finance which allows them to manipulate the investing public. In the Wall Street universe, up is down, down is up, language and strategies are counterintuitive and their disdain for the average investor is real. One Wall Street firm even infamously got caught referring to their own clients as “Muppets.”
Under current rules, it’s caveat emptor. So, it’s vitally important to your financial health to know if your advisor has any conflicts of interest with you. Demand to know if they are compensated by anyone other than you. Even if Trump leaves the new DOL fiduciary rule alone, don’t rely on government regulations to protect your nest egg…they have loopholes as big as Texas, and the wolves know exactly how to navigate them.
As I sit here writing this article, Investment News is reporting that after an actual reading of the “final draft of the order…that his (Trump’s) order contained no explicit directive to delay the rule nor did it tell the DOL to work with the Department of Justice to seek a stay of litigation regarding the rule. Instead, he (Trump) merely ordered the DOL to review the rule, telling it to ‘prepare an updated economic and legal analysis’ and giving it the power to rescind or revise the regulation.” Maybe there is hope for the DOL Fiduciary Rule after all. You can find a link to this Investment News’ article and other relevant articles to the fiduciary rule on my twitter feed: