Good intentions don’t necessarily guarantee good results.
The basic idea behind the Department of Labor’s fiduciary rule is good: to protect consumers seeking retirement advice by requiring advisers to put their clients’ best interests ahead of their own profit when making recommendations regarding their retirement savings.
I’m a fiduciary, and I wish every person giving financial advice acted under this standard, part of which took effect June 9. But I worry the rule, as it’s written, will cause more harm than good – that advisers will be hobbled and investors could be hurt. Here’s why:
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Advisers might start hedging their advice. If a fiduciary doesn’t offer the mandated level of service, there can be serious ramifications – including potential civil and criminal penalties. There’s a sense in the industry that the new rule may make investors more litigious, which means advisers could decide to shield themselves by offering advice that’s more defensive for themselves than purposeful for the investor.
Management styles could become homogenous. It’s a lot easier to fail conventionally than to succeed by differentiating yourself. Innovative ways of growing and, more significantly, diversifying a portfolio (tactical management, for example, or investments that go beyond stocks, bonds and mutual funds) could be overlooked if advisers worry clients will balk at the first sign of flatness. They’ll likely go with recommendations that seem safer and less expensive. For example, passive indexing as an investment style has performed well recently, but it’s only one option among many and may not be well-suited for every client or every economic cycle.
“Recency bias” may become more of a factor. Investors and advisers can have selective memory when it comes to the ups and downs of the markets. Unless you’re a retiree whose nest egg was wiped out in 2000 when the dot-com bubble burst, you may not even remember the effect it had on the market. Even the 2008-2009 global recession seems to have been forgotten by many. It’s already a challenge, in this bull market, to get soon-to-be retirees to let go of a portfolio mix that’s too risky or to convince retirees that it’s better to lose less than to gain more.
The negative feedback loop could get even louder. Advisers should be prepared for the event that even if their clients don’t question what they’re doing, a friend or someone in the media likely will. (Thanks to the Internet, everyone is an expert these days – and possibly pushing their own newsletter or blog.) Let’s say an adviser recommends an active fund that pays a commission. It may be cheaper net to the client for the commission to be paid than an ongoing fee, yet if a client believes a commission is high (and not all individuals know what a high fee is) due to what he or she has seen or heard, the client may make a decision contrary to his or her best interests. Mathematically, a 5% upfront commission on a seven-year account or time frame costs a client less than 1% per year, but if a client is spooked because we now have to disclose we get an upfront commission, he or she may choose not to contribute at all, even if it’s the prescription the individual needs.
Now, will the rule change things for the better? I hope so. I hope small brokers will stay in business and all variety of clients will be able to be accommodated. This rule will cost money; it just needs to go back to the clients’ pocket where it belongs, not get invisibly deducted from their future earnings due to poor implementation of new practices. At the end of the day, people have different expectations and goals. They have different fears. And all of these different options we have were created to accommodate consumers’ various needs.
It would be a shame for an adviser to fail to do more for clients because of a rule designed to protect them.
Kim Franke-Folstad contributed to this article.
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