It’s hard to argue with “investor protection.” It always sounds so nice, especially since so many of us rely on investments for any hope of retirement.
But just as a rose by any other name would still smell as sweet, a restriction on investors is still a restriction, even if you call it something nicer. The Department of Labor’s fiduciary duty rule is such a malodorous “rose.”
While its proponents claim that it will help investors, in fact it risks “protecting” them right out of the market.
Far from helping investors reach higher returns on their retirement accounts, the rule risks shutting off the principal source of investment advice available to most investors by simply making it too expensive to continue offering this advice.
The rule applies to the communications between brokers or other advisors and people buying retirement investments. While it has many ins and outs, the basic concept is that, if the rule becomes effective, brokers would be deemed “fiduciaries” under the law.
This means that they would be bound to handle their clients’ business with the same care that a reasonable person would in handling his or her own business. This sounds easy enough, like the kind of thing your grandmother would advise you to do, or like a version of the golden rule.
But when the law is involved, it’s rarely as simple as applying homespun wisdom. It’s one thing to simply decide to take a client’s interests into account. This is a simple decision and one that will likely garner a broker a reputation for honesty and customer service.
Adhering to a legal standard is different. It requires not only incurring the expense of complying with the minutiae of the regulation (i.e., hiring a lawyer, or, let’s be real, a team of lawyers) but also subjects the broker to litigation risk. Even baseless claims can be horrifyingly expensive to defend against.
The rule also makes it much more difficult for many brokers to use the types of compensation structures they currently use. In fact, that’s the idea behind the rule.
Its proponents’ principal concern is that brokers steer investors into particular retirement products not because the products are best for the investors, but because the broker gets the most fees for selling that kind of product.
If investors are confused about whether they’re talking to an advisor, whose sole job is to help them make the best investment possible, or to a salesperson, who wants to make a buck, that’s a problem.
But the solution isn’t to make salespeople into advisors; the solution is to make it clear they’re salespeople.Americans are completely capable of understanding this distinction. Think about all the transactions, including transactions for complicated products, that Americans engage in everyday, fully aware that they are getting advice from salespeople with personal interests at stake.
Americans routinely buy cars, computers and houses relying on advice from salespeople. The reason is that the salespeople are incredibly knowledgeable about their companies’ products.
Because the customers know they are talking to a salesperson, they will benefit from getting the information but also take the recommendations with the appropriate grain of salt.
Why are retirement products different? Just as a car shopper might go online and learn about different types of engines and fuel efficiency from online resources, an investor is capable of going to educational sites to learn about fee structures and to know what type to look for.
Rich investors use advisors who are paid a fee expressly for providing advice, typically about 1 percent of assets under management. But this structure only works for rich people.
The work involved in managing a portfolio with $1 million in assets is not that much more than the work required to manage a $5,000 fund. But 1 percent of $1 million is $10,000 while 1 percent of $5,000 is just 50 bucks.
It’s not cost‐effective to offer these services to average investors, and so most advisors don’t accept them as clients.
Although the rule is touted as a means of protecting average investors, it is likely to imperil them by cutting off access to the one kind of advice they can access.
The solution to investor confusion about brokers’ compensation is to clear up the confusion, not to cut investors out of the market.