Knut Rostad, founder and president of the Institute for Fiduciary Standard, doesn't pull punches and seemingly doesn't play favorites.
A vocal supporter of the Department of Labor's fiduciary rule, Mr. Rostad believes registered investment advisers should guard their flank against brokerage firms trying to leverage the fiduciary banner.
At the same time, he continues to push RIAs to raise their own standards, particularly when it comes to fee disclosure.
InvestmentNews: Under a Trump administration, some see the Department of Labor's fiduciary rule as being on the ropes. How do you see the rule evolving?
Knut Rostad: Over the next six to 12 months, I see uncertainty as far as the eye can see. It will almost certainly be delayed and modified. The questions are how long and how much and no one knows the answers. No one.
The net effect is firms have to prepare on the compliance side.
But the other side, the marketing side, needs more attention. RIAs should be concerned because what we see Merrill Lynch doing will probably become the model for how other broker-dealers act. Irrespective of whether it goes through or not, firms will claim fidelity to their definition of a best interest standard. They will rush up and down the street with the fiduciary flag. When tens of thousands of brokers start doing so, for the first time in 2017, as newly minted fiduciaries, what will RIAs do? RIAs should be concerned.
If the DOL rule is delayed or is deeply weakened, such that the enforcement mechanism is dismantled, RIAs should still be concerned. They should be concerned because B-Ds will still assert they serve client's best interests — even in the scenario where there is no enforcement mechanism — without showing how or that they actually do so. One hopes that a B-D that has invested much in complying with the DOL rule will actually comply, absent any enforcement mechanism. But “hope” or an affiliation “in spirit” doesn't cut it. Investors should require evidence of compliance in policies and procedures, because otherwise we are assuming that many firms that opposed the rule will now, voluntarily, comply and follow the DOL rule as envisioned by [DOL assistant secretary] Phyllis Borzi.
IN: Do you consider robo platforms financial advice?
KR: No more than I consider Subway to serve gourmet meals. To equate a digital platform and output of an algorithm to advice is grossly misleading. But that is where the language has brought us today. Today, it is not a robo algorithm, or digital platform, “it's advice.” This is blatant encroachment and I don't understand why RIAs have not seemingly taken note and objected.
Advice is truly distinctive and important and uniquely a human task. And it looks like, in how the language around “robo-advisor” has evolved, we have given this distinction away, for free no less.
IN: How comfortable are you with the current practices regarding fee disclosures?
KR: Overall, when you look at what the different definitions and requirements for fee transparency are, and you can look at different advisory groups and how firms explain fee transparency, I think we're in the dark ages.
As described by the advisory industry, fee transparency doesn't mean telling clients what they're paying.
The standard is we will tell you how I'm being paid. That reflects a view of the world and the industry that really is in the dark ages. It's not a level of transparency that we as consumers expect or would accept in almost every other professional or commercial transaction.
That being said, there are increasing voices and research pointing out that this is a huge problem.
IN: Why isn't it enough to just tell a client you're charging a percentage of assets under management?
KR: Because the unknowns are the underlying investment expenses.
Are we talking about a portfolio made up of ETFs or mutual funds or something else?
That piece is harder to get to. Some advisers are already doing this, but most are not. That's the piece most often left out or overlooked.
In terms of potential importance, this is one piece of what it means to be a fiduciary that resonates with many investors. This is one way RIAs can differentiate. The point is not that there aren't a lot of brokers who would agree true transparency of fees and expenses is reasonable. There are. The point is they would not be able to comply with this requirement given their platforms and firm policies. The potential power of fee transparency is under appreciated. The potential impact of getting to true fee transparency is underestimated.
IN: Where do things stand on the potential debate between yourself and Anthony Scaramucci, the Donald Trump adviser and SkyBridge Capital executive who has been critical of the DOL rule?
KR: I hope we have a debate as his office has said he wants to do. We have points to put under a bright light. Anthony's case against the DOL rule reflects the case that has been brought against it for the last two years. The anti-fiduciary arguments overflow with dubious assertions and misleading and factually inaccurate statements. They should be addressed in a public forum.
There has been some brilliant writing and comment letters. Barb Roper (director of investor protection at the Consumer Federation of America) deserves the Pulitzer prize for comment letter writing, but that's not the same as a public forum. I think our side has often been too polite in responding to the anti-fiduciary arguments.
Based on our last communication with [Mr.] Scaramucci's office, they said they will reschedule a debate with me after the inauguration. I look forward to a re-scheduled debate. I want to explain why his arguments are misleading or false. And I would like Anthony to explain to me why they are not — in a public forum. That sort of interchange hasn't happened but could be useful to moving the discussion forward. I think there is something to be gained by a further back and forth.