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It’s been oft-repeated that the road to hell is lined with good intentions. I think this applies to the now-dead so-called fiduciary rule, the Obama-era retirement account regulation that was designed to protect investors from conflicts of interest. A decision by a U.S. court in late June effectively put an end to the rule, and the Securities and Exchange Commission is now stepping in to move forward with its own best-interest standard for investment advisors and broker-dealers who make recommendations to retail investors.
But this isn’t just another article lamenting the death of the fiduciary rule, nor is it an antiregulation rant. It is simply that the fiduciary rule really wasn’t about the investors, who were supposedly the beneficiary of it. It couldn’t be because investors want different services from their advisors. Not every investor wants handholding, financial planning, rebalancing, portfolio management, keeping-in-touch phone calls and periodic reviews.
Some retirement accounts could be invested in a target-date fund, in which the investor has zero intention of making any changes to the account, which makes an assets-under-management fee an unnecessary expense to the client. And some clients wish to pay for investment and planning services as a separate fee apart from an assets-under-management fee.
It all gets confusing, because there are endless ways to split hairs on this. So let’s give you the simple reason why the fiduciary rule sounded so good on its surface.
In a fee-based account your advisor doesn’t receive any extra compensation if you follow his or her recommendation. In fact, it takes up the advisor’s time and energy to manage an account and all of the things you want out of your relationship with your advisor. Also with a fee-based account, your advisor earns a higher fee in dollar terms if your account appreciates in value. So for those two reasons, it only makes sense for the advisor to recommend investments that are in your best interest when you’re in a fee-based account. If this sounds like a smart way to go for most investors, then I agree with you. Conflict-free advice is an incredible benefit for all investors.
Enter Merrill Lynch, which decided to make it mandatory for all IRA holders to switch to fee-based accounts. Was it optics? Was it a decision that the ivory tower folks thought was in their clients’ best interest? Was the firm using the rule to push its clients into fee-based accounts that may be more profitable?
The securities industry miscalculated the public’s desire for the fiduciary rule by shoving it down their clients’ throats. It became a marketing tactic with different firms falling all over themselves to out-saint competitors. This holier-than-thou approach became more about the advisors and less about their clients. We live in a society that values freedom of choice and unlimited options. Telling your client that their account has to be turned into a fee-based account regardless of their desire for it won’t garner much support.
Last week Merrill Lynch said it will switch back to giving clients a choice, starting Oct. 1, a decision made as a result of client requests.
The fiduciary rule had holes in it, like any regulation. It was meant to prevent unsuspecting retirement account holders from getting screwed by unscrupulous brokers and insurance salespeople.
Many market experts predicted the best-interest standard would also encourage use of low-cost ETFs within fee-based portfolios, a type of investment fund I use with clients and an area of the market where the offers for investors, both fund management fees and trading fees, keep getting better. One big Wall Street bank estimated that ETF assets would triple to $10 trillion in five years because of the rule. It wasn’t really too far from a good regulation, and I hope it comes back with necessary improvements.
One way to go about the fee-based vs. commission-based choice is to actually document what the client wants out of a relationship with an advisor and then for the advisor to come up with the best solutions to fit the description. Imagine that: listening to what the client wants and needs before determining fee vs. commission.
What is the final, defining litmus test of whether a client is better off in a fee-based or a commission-based account? That’s the rub in all of this. There is no red line, which is why the one-size-fits-all fiduciary rule couldn’t work. I do think most clients are better off in a fee-based account, which is why the regulation should be reworked and brought back to life.
The independent side of the securities industry embraced the spirit of the fiduciary rule a long time ago. I decided long ago that the best way for me to serve my clients is through a fee-based relationship, because it works well with the kind of services I offer. I know I can’t be everything to everyone and that I need to focus my attention on the clients who are the ones whom I can help and who value my offerings. That is the true essence of a relationship, which got lost in all of this.
—By Mitch Goldberg, president of investment advisory firm ClientFirst Strategy