Fiduciary rule needs momentum

Mary Jo White revealed last week her support for a uniform fiduciary standard for everyone giving retail investment advice. She had kept the industry on tenterhooks since last fall, when she said she would soon announce her position. She stayed mum last month as the White House and the Labor Department moved full bore toward such a requirement in the retirement space. The chairwoman of the Securities and Exchange Commission even showed reticence — and poise, frankly — when two of her commissioners came out against a fiduciary requirement before one was even on the table. Michael Piwowar seems to favor enhanced disclosures. We all know how much attention investors pay to those and how well they understand them if they do pay attention. And Daniel Gallagher Jr. has become the resident blowhard for the opposition, using phrases like “runaway train” to describe the pending DOL rule and characterizing those who disagree with him as “the nanny state.” So it's about time the chairwoman took the helm and steered the agenda of this supposedly nonpartisan body beyond its present Republican-Democratic split. The two Democrats, Kara Stein and Luis Aguilar, are expected to support a fiduciary standard. What encourages this publication and advisers working under the Investment Advisers Act fiduciary duty are Ms. White's comments indicating that she would root any new standard in the foundation of that act. One key aspect is a principles-based approach versus a rules-based one. When principles undergird the mandate, fewer instances of “Well, that wasn't in the rules” are accepted. Instead, people are held responsible for their professional judgments and whether those stem from an allegiance to ethics — in this case, putting clients' best interests first.

DODD-FRANK

Many fear that such a nebulous definition leaves brokers open to lawsuits, but that will depend on how the duty is written. As we've seen in early reactions to Ms. White's comments, industry groups vociferously opposed to a DOL fiduciary rule have been more tempered in their response to an SEC rule. They appear to have faith that perhaps all is not lost, because an SEC rule would be structured according to the congressional authorization in Dodd-Frank — which includes broker protections for charging commissions, selling proprietary products and having a limited continuing duty of care. Don't think for a moment they will step aside while the rule is being developed, though. Although Ms. White's comments were welcomed by the pro-fiduciary crowd, a few concerns linger. One concern is whether absorbing a number of elements of the broker business model into a final rule would leave many conflicts in place. A watered-down rule for all is worse than no rule for some.

CLOCK IS TICKING

Another concern is that just beginning discussions two years into Ms. White's tenure suggests that swift action is unlikely. Make no mistake, the clock is ticking. There's no guarantee Ms. White will retain her position when a new administration comes to power in less than two years, whether the president is a Republican or a Democrat. While her statement that “getting the balance right is absolutely essential” is spot on, too much horse-trading would only prolong the status quo, in which it's OK not to put clients first. One obstacle often cited by fiduciary critics — that the responsibility would prove unsustainably costly, at least in terms of being able to serve less-wealthy clients — has been heard loud and clear. Ms. White expressed her commitment to ensuring that any final rule won't constrain the provision of sound advice to anyone. But, again, looking at real-world practices versus sky-is-falling estimates, many in the lower-income ranks aren't profitable enough to receive sound advice now. But any additional cost imposed by a fiduciary duty should not be held up as a reason to get away with not acting in any client's best interest. Think of the cost as a down payment on fostering an industry the American public finally trusts. That confidence would benefit not just investors but everyone providing investment advice.