In this politically heated environment, yet another partisan battle ensues in Washington. It highlights a sad reality of how difficult it is to do what is so obviously right for consumers. In particular, the battle is over the concept that all investment advisors should adhere to a legal fiduciary duty to their clients when providing financial advice. Until very recently, this duty was largely followed by only a subset of financial professionals, registered investment advisors.
Viewed at a high-level, a fiduciary duty is simply the professional obligation to place the interests of the client first at all times and under all circumstances.
In many ways, the public’s ability to recognize a financial advisor acting as a fiduciary reminds me of that old legal definition of pornography – you know it when you see it. However, that doesn’t cut it when some in the financial services industry seem intent to blindfold the public. Amid a flurry of paperwork and small-print disclosures, most consumers are wholly ill-equipped and outgunned. That is precisely what industry regulation is designed to counter.
The quest to implore all financial advisors to operate under an obligation to act as fiduciaries has been the Holy Grail for as long as I can remember. Due to a massively powerful lobbying effort from those with a vested interest to avoid a legal obligation to first serve the interest of their customers, the foot-dragging among our regulators and politicians over the years was striking to watch. Finally, in April, the Obama administration took matters into its own hands.
Using the existing framework that imposes a fiduciary duty standard on financial advisors in their dealings with pension and employer-sponsored retirement plans, the Department of Labor simply expanded that same obligation to any professional who also provides advice to consumers who own an individual retirement account (IRA). In one fell swoop, that regulatory expansion brought almost every financial advisor into the fiduciary world. With a stroke of the executive branch’s pen, the last foot was dragged across the finish line.
Predictably and disappointingly, the House and the Senate – mostly along party lines -recently voted to strike down the new fiduciary duty rule. Obama’s veto last Wednesday successfully kept the rule in place.
In my view, despite the loss of a clear-cut competitive differentiator for me and my fellow registered investment advisors, the new fiduciary rule is a resounding victory for consumers. Let’s hope it survives our dysfunctional politics.