Is it the Government's Job to Force People to be Nice?

I'm going to use this column to reveal something about the financial industry that doesn't seem to be public knowledge. It consists of two distinct sects of professionals who don't see eye to eye on how the industry should operate. On one side there are the product salesmen (e.g. Brokers, Insurance Agents, Wholesalers, etc.). On the other side their are advice salesmen (e.g. Investment Advisors, Financial Planners, etc.). Each group has very distinct visions for the industry and at the center of if all is the Department of Labor's 'Fiduciary Rule'.

What's the difference between the two? Product salesmen represent particular products related to a segment of the industry. Whether insurance products, investments products or something else, their job is to present, explain and sell the product to clients. Advice salesmen provide clients with strategies/solutions to help solve a problem or goal. For the former the loyalty is more likely to be to the product or the company. For the latter the loyalty is more likely to be to the client.

Is one better than the other? No, they both serve a purpose and are valuable parts of the industry and to the public they serve.

Then what's the problem? Why the in-fighting? The real value of any profession is the education and knowledge presented to the consumer. Consumers should have a resource to get their questions answered so they can make informed decisions. The internet and other sources have made it easier for product information to be obtained, and the value of product representatives has been watered down over the pas few decades.

The fix to this development has been for product representatives to begin presenting themselves as the sellers of advice and hiding the fact that they represent certain products. This allows product salesman to present products as 'solutions' to problems and their recommendations as 'advice'. This creates a problem where expensive products can be presented as a viable solution even when there are similar less expensive products that also solve the same problem. Sure a solution may have been presented, but it isn't necessarily the very best option for clients.

Obviously, advice side professionals are not fans of products being sold as solutions. Furthermore there is the concern that the conflict of interest that comes with higher price products dilutes the legitimacy of the profession. Advice side professionals prefer the integration of the fiduciary standard into the industry.

What is the purpose of the 'Fiduciary Rule'? In short, the rule's intent was to make it very clear which side of the industry a professional represented. I place a lot of stress on the word 'was'. The general effect of the rule was that investment professionals would be required to place their clients' interest ahead of their own when providing recommendations. In other words, professionals had to act as a fiduciary for their clients. This would require expenses to be a factor in making recommendations, limiting the pool of products which could ethically be recommended.

Advice driven advisors applauded the rule as it provides the desired legitimacy for the profession. Product salesman abhorred the decision because it would affect their pocket book. Arguments were made to Congress that the rule would cut out a segment of investors from being able to obtain advice and that it would cut off services that client's wanted. "Hogwash", says I, as I believe that the rule provided clients with even more information to make a sound decision.

But alas, money is powerful and lobby Congress is effective. The rule got watered down to to it's current language, which requires a fiduciary requirement solely for retirement accounts (with a lot of caveats and special cases). The language is now a shell of it's original form and the rule would not really do much for the benefit of the consumer. It's eventual repeal won't change much regarding consumer protections.

So how do I feel about the development and destruction of the DOL rule? The twist to the story is that I am ecstatic with what has happened and what is likely to happen over the next year. I understand the need for regulations but I am not a fan of over regulation. My opinion is that the federal government should protect, not oversee. The rule was an overreach by the government to control how the industry operates. The consumer should be allowed to educate themselves in order to decide how they want to interact with the professionals in the industry and how they want to use available services.

My glee comes from the fact that it seems that consumer awareness is exactly what resulted! The song and dance of the bureaucratic/lobbying process (with the help of easy access to information) allowed the public to see that there was a problem at hand and they needed to arm themselves with information for their best interest. It also forced the industry to realize that the culture is evolving and there has been a big push to move to a fee based, client centric structure.

I get asked if I'm a fiduciary almost every time I have a meeting with a potential client. That's good because, 1.) people are doing the necessary research and asking the right questions 2.) I am a fiduciary, so they can check that off their list and save a lot of vetting time! Five years ago I was never asked this question. I'm glad to see the evolution that is occurring in the industry.

The government did it's job, I guess, to bring awareness to the populace, and the populace was able to say 'we got this....we don't need no stinkin' rule'! In my opinion, that is a great result!

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