(photo source: http://gurpshexagono.blogspot.com/2012/02/uma-nova-novidade.html)
On Friday, February 3, the Wall Street Journal reported that the new administration would likely sign an executive order that would delay or rescind the pending Department of Labor rule that says that anyone who provides advice on retirement accounts will have to operate as a fiduciary.
For those unfamiliar with the fiduciary concept, it’s pretty straightforward: anyone who acts as a fiduciary is required to put a clients’ needs and best interests ahead of their own. The alternative standard of care in the advisory industry is suitability, which says that an advisor’s recommendations to a client need only be suitable for their situation: an advisor is free to suggest a higher cost product that might have an associated commission coming back to the advisor when a perfectly comparable lower cost alternative is available.
Over the last few years, banks, brokerage companies, insurance/annuity providers and their associated lobbying organization have spent millions of dollars fighting against the Department of Labor rule. And it’s easy to see why. Their entire business model was being threatened! If they couldn’t legally push higher cost, commission-based products onto unsuspecting consumers, they would see a huge hit to their bottom line. Some of our industry publications even reported that large numbers of older advisors were considering retiring rather than trying to comply with the new fiduciary rules.
This always struck us as strange. Maybe it’s because Woodward Financial Advisors has always acted as a fiduciary and always will! We can’t understand why an advisor wouldn’t want to openly embrace the fact that they placed client’s needs ahead of their own. We sure do! And what client wants to work with an advisor that can’t say that they always operate as a fiduciary in every circumstance?
Pretend this same situation was at play in the medical arena. Let’s assume your doctor prescribed you some medication. Would you rather she prescribed the drug that cost $100 (and by the way, had a 20% rebate coming back to your doctor that she wasn’t required to tell you about), or an equally effective drug that only cost $20? Would you at least want to know about the $20 option? Doesn’t this seem obvious?
Critics of the fiduciary rule argued that it would limit consumer choice. Consumer choice works great in a system where both the buyer and the seller have equal amounts of knowledge and information. That is NOT the case with financial products. If limiting consumer choice means fewer ridiculously high cost/high commission variable annuities and other nonsensical products foisted on unsuspecting people, that limit is fine with us.
But that’s not going to happen. Barring some public outcry, the Department of Labor rule will be perpetually delayed, drastically changed, or die some legislative death. And some time in the future, when the financial services industry has once again taken advantage of an unknowing public, we’ll hear the outcry and moral outrage about greedy bankers and unscrupulous brokers. We probably won’t hear how great it was that we had all that extra consumer choice. And maybe then we’ll get to try this whole thing again…