As everyone in the industry knows by now, the U.S. Department of Labor finally
produced its fiduciary rule for retirement accounts. Fought for months by the brokerage industry, the
final iteration of the new regulation gives a much longer runway for brokerage firms to be in compliance. It also creates a Best Interest Contract Exemption, or BICE, which enables clients to still pay commissions in their individual retirement accounts as long as their adviser contractually promises to adhere to a fiduciary standard.
In addition to information about the rule, the DOL's website also features
interviews with investors who had lost a significant percentage of their retirement assets, presumably from the result of “bad brokers.” Does the DOL truly believe the new regulation will prevent this type of behavior? I have sympathy for the families of those depicted on the website, but believe that the regulation, had it been in place, would not have protected them: Unethical advisers will take advantage of unwary clients regardless of the business model. Suggesting to the public that this new regulation will somehow protect them from the unscrupulous salesmen in this industry is like the police promising that your house will never be robbed simply because robbery is against the law. Just as I still lock my doors and set my alarm in my house when I leave, investors should have their guard up and be wary of the predatory financial salesman. The DOL is not helping investors by suggesting that the new regulation is a panacea that will protect the gullible or keep investors from ever having losses in their investments.
(More: The DOL fiduciary rule covered from every angle)
Many in the industry are bemoaning the extra burden, the extra regulation. But has the industry done enough to police itself and force out the unethical firms, the predatory brokers? I believe that 99% of the advisers within the brokerage industry are ethical practitioners who care passionately about their responsibilities to their clients. However, the wealth management industry has given the general public years of scandals to fuel their suspicions that financial advisers do not always act in their best interest. And there are still bad brokers who manage to keep their licenses no matter how many “dings” they have on their compliance records.
I've also spoken to some in the RIA world who are disappointed if not downright horrified that the new rule was enacted, creating a “fiduciary lite” which diminishes the argument about what a true fiduciary standard should be. Though I appreciate and respect their thoughts, I do think that it is time they acknowledge that there are times when clients feel that that commissions are in their best interest. In a pragmatic world, this new rule strikes me as a fair balance between the pure fiduciary standard and the broker-dealer world.
While I object to those interviews on the DOL website, they are an indicator of the lack of faith regulators and investors have in the basic honesty of wealth management practitioners. I believe the wealth management industry must be proactive to win back the trust of both the regulators and the public. The biggest firms can start by publicly terminating those few advisers whom they have kept employed despite horrible compliance records. Unethical advisers, no matter how productive, harm the industry every single day.
(Related read: Wirehouses seen winning in final fiduciary rule)
With that in mind, I believe that the wealth management/brokerage industry should proclaim that it is moving towards a fiduciary standard. It is naïve to think that this action from the DOL will not eventually lead to similar actions by other government agencies for non-retirement accounts. The BICE carve out in the regulation gives the wealth management industry a road map to permit commissions with the protections for the clients of transparency and full disclosure. Being on the side of the argument that says you do not have to act in the best interests of your client is laughable to even say out loud. It's time for the brokerage industry to get ahead of the fiduciary train instead of standing in front of it in a futile attempt to stop it without getting run over.
Danny Sarch is the founder and owner of Leitner Sarch Consultants, a wealth management recruiting firm based in White Plains, N.Y.
