The new fiduciary rule got me thinking last week when I had to take my car in for repairs. During the week, I had to use the services of a ride-sharing app to conduct business. These are amazing inventions of the market that happened to sneak around the regulation of taxi services and provide expanded coverage areas, services and employment.
During one trip, the driver began telling me about recent attacks on both drivers and passengers. He felt the government should regulate these services much more. I agreed with the driver that these sorts of things are terrible, but I told him a story of my own, using the government-regulated taxi services here in Detroit. The driver had a male passenger as "muscle" in case I chose not to pay the double fare that was charged upon arrival, and he used what I found to be an unauthorized payment system. When I called to complain, this sounded like it was a frequent happening to avoid the regulated rates and billing system.
Even government regulations will be ignored when it means there's money to be made. Since the obvious result of all regulations is increased cost (which falls on the good drivers, financial advisors, etc.), the net result is fewer consumers receiving their goods and services, or higher costs for those services. (For more, see: How Trump Could Repeal, Soften Fiduciary Rule.)
The Department of Labor's (DOL) fiduciary rule is new regulation that has been promoted by advocates to – in their words – “put clients' interests first.” As a fiduciary to my clients, my clients already experienced this before any rule. I chose voluntarily to work at this standard.
However, this rule imposes penalties and threats to financial advisors like myself, to where I estimate the law will cost me between one to four extra hours per client, per year. And worse yet it may be work that needs to be done before they or I know if we will work together. This is a cost for prospects who may not choose to work with me that I would have to pass on to current clients. My insurance premiums will rise as more advisors are grouped into the fiduciary bucket, and these advisors and I face greater chances of a lawsuit.
The result of the above is that clients will have fewer affordable choices to engage the services of a fiduciary who knows them personally. More will be turned away to call centers or advisors who provide cookie-cutter advice for a small fee. This advice may be more costly over the long-run by being less personal, from a less experienced advisor, even though it meets the technical definitions of being "in a client’s best interest."
Can the Fiduciary Rule Reduced Costs?
Some claim the DOL rule has reduced costs. This simply is not the case. In addition to the many clients of financial advisors who have been forced to change them out of past investment options and plans and into higher cost "management" services, today we have fewer investment companies and options. If you follow this trend into the future, it is obvious that there will be very few firms that provide a "monopolized" service at a low-cost, while any other advisor that wants to work independently will have to charge higher costs. (For more, see: What You Should Know About the DOL Fiduciary Rule.)
Too Much Regulation?
If you like your financial advisor, you may not be able to keep them if this rule stands. Some of my colleagues who support the fiduciary rule will frequently ask, “How can anyone be against doing what’s best for investors?”
I answer that in the same way I can be against over regulating Uber, Lyft and other services. Government regulations similar to the fiduciary rule in the transportation market would shut down driver operators who are not in the top 10% of drivers, who do not drive the safest and most expensive cars, and perhaps who otherwise do not provide ancillary services I do not need as a rider. Costs would rise to a level that may be similar to or pass taxis and other services, and perhaps that is the end goal.
Regulation does not protect consumers, lower costs, or fix markets. That’s not how markets work. In markets, consumers choose the services they want to consume. And here lies the truth behind those who support the fiduciary rule – advisors, intellectuals, lawyers and politicians want to choose what is best for you, rather than allowing you to make that choice yourself. You must pay double what you would otherwise for products and services you do not need, and for your advisor to put in hours of research before accepting clients.
Many may choose not to engage the services of a fiduciary, just as I may choose one transportation service with lower car standards than another. In my opinion, the actual area many who would like to control your options should be focused on isn’t controlling choice, but rather these advisory associations should be focused on winning arguments and clients in the market and the arena of ideas. (For more, see: The Devil Is in the Details with New Advisor Rules.)
Fiduciary Rule Consequences
Here are some consequences that have played out in the market so far:
- Large firms have stopped offering products and services or sold to competitors and reduced competition and choice.
- Advisors are preparing for increased costs and time spent on complying with a vague rule that provides no guarantees their preparation won’t cross the rule.
- The government is already crafting exemptions to this law, and for those products that many advisors believe need more regulation like equity indexed annuities. The consumer confusion surrounding these products, which often have significant penalties that can last for decades if consumers realize this product does not deliver, was one of the primary reasons many advisors supported this law in the first place. To have any exemption, even if it comes with regulation, only means that advisors that offer these products will continue to operate on an unequal playing field, and increased regulatory cost will simply mean a worse product for consumers.
- Financial advisor associations who have focused on this rule have diverted resources from educating and acquiring consumers in the public domain by winning the battle of ideas and letting them choose. I recently reviewed several of my associations that promote fiduciary advice, and both sent 25% fewer leads to my website in a year where my business is up 100%. Rather than listening to the administration when it says they will reduce regulation and realigning to promote their message, or leading and offering pro-consumer regulations, they seem to be content doing anything but.
Due to the above, the only reasonable course for the Trump administration is to end this advice killing rule, rather than delay, and let the market get back to providing better services to more consumers.
If the fiduciary rule was halted, could it be possible that we could have better regulation and outcomes for clients? Yes. The solution is as simple as it is in healthcare, where we know removing regulations that limit the monopolies some providers have in certain areas would increase choice, lower cost and improve quality.
Likewise, we could increase competition by following the model of Health Savings Accounts, which allow all the same opportunity to the same tax credit, where they may invest their money in the account of their choosing, no matter what company their employer may choose. This would increase the quantity and quality of financial advice by removing the monopoly system of 401(k), 403(b) and other providers that is unequal, inefficient and has never put advice at the forefront of the retirement crisis.
I applaud the administration and Congress for their comments on delaying this rule. But that simply invites uncertainty, though hope they provide certainty and a "great" retirement system by removing it, and the obstacles to paying fiduciary advisors from their retirement savings in the over regulated system that exists today. (For related reading, see: The Fiduciary Rule: Advisor and Client Impact.)