Let brokers be brokers: A response to the lawsuit against the DOL fiduciary rule

I have a unique position being able to work every day with the future of the financial services industry. Most of these students didn’t even know the financial services profession existed when they started attending college. One way or another they discovered the financial planning major, or the industry, and decided they wanted to become a professional in the industry.

As I speak with each student about why they selected the major or why they want to enter financial services, the same themes continue to rise to the top of their lists:
• “I want to help people improve their lives.”
• “I want a career where I can make a difference.”
• “My family was always terrible with money and it caused stress. I want to help other families avoid having to go through what my family went through.”

Although I believe business schools can attract students seeking dollar signs, I rarely see students say they chose this major/profession because of the high expected income. This makes me feel quite optimistic when I think about the future of the financial services industry; their heart is in the right place.

OPPONENTS NOT OPPOSED TO ACTING AS FIDUCIARIES

However, there is a lot of controversy in the industry right now surrounding the DOL fiduciary rule and the lawsuit filed this week in Texas to block this legislation. I’d like to give some insights into what is going on in the industry, and I’d like to point out that the industry itself and the government helped contribute to the mess we are now facing.

I don’t think opponents to the DOL fiduciary rule oppose acting as fiduciaries or acting in the best interests of their clients. I believe they oppose being exposed to frivolous lawsuits by investors with unrealistic expectations of how markets and investments should perform. And any lawsuit will take a toll on the professionals in the industry, and their reputation, regardless of its merit.

While I applaud the DOL and Phyllis Borzi for having the guts to move when the Securities and Exchange Commission and Congress didn’t, I fear that what we now have is worse than what we once had.

WHAT WE HAD WAS PERFECT

The original industry regulations from 1934 and 1940 were perfect — just not perfectly enforced. The SEC Act of 1934 effectively stated that brokers were largely order takers, like a waiter at a restaurant, and therefore did not need to act as fiduciaries. If a patron wanted to order the worst thing on the menu, that was their prerogative, and the waiter didn’t need to talk them into vegetables and water.

The Investment Advisers Act of 1940 came to be viewed as creating a fiduciary standard for all advisers, unless their advice was solely incidental. Meaning, if I hold myself out to be an investment adviser, or financial adviser, my advice needed to be in the clients’ best interest. Clients could still do the wrong thing, or ignore the advice of their adviser, but advisers had to be professionals, providing competent advice, and live up to a fiduciary standard.

WHERE WE WENT WRONG

The real underlying problem is that not all individuals have heaping hatfuls of honesty and infinite amounts of integrity. Since some people involved in a principal-agent relationship (be it doctors, auto mechanics or real estate agents) will take advantage of information asymmetries that exist between principal and agent, the government needs to step in. As John Adams declared, “the primary purpose of government is to protect the sheep from the wolves.”

The DOL feels as if they accomplished that with the fiduciary ruling, and our neighbors in England, Holland, Australia and New Zealand feel like they accomplished that by banning commissions on financial services products, and requiring professionals to meet a “minimum education standard.”

I feel as if the U.S. had it right since 1940, we just stopped enforcing the law. If a broker wanted to take orders, or a salesman wanted to push product, they could under the suitability standard. But the very second you introduced yourself as an adviser, you had to be a fiduciary. Too many professionals in the industry were operating as part broker, part salesman, part adviser and the government never intervened.

I wholeheartedly support the fiduciary standard, and I support the people trying to toss the fiduciary ruling out. The original legislation we had was perfect, we just need to enforce it. Let brokers be brokers. Let salesmen be salesmen. Let advisers be fiduciaries, but you can’t let anyone else refer to themselves as a financial adviser unless they are willing to become competent, and become a fiduciary to their clients 100% of the time.

Luke Dean is an associate professor and the financial planning program director at the Woodbury School of Business at Utah Valley University.