For all of the arguments raised by the Department of Labor's proposed conflict-of-interest rule — 938 formal comments have been posted online, the preponderance in opposition to the rule — the most obvious, and perhaps most damaging to opponents of the rule, has yet to be fleshed out, according to one RIA.
Not even the DOL has pointed out what Michael Kitces thinks ultimately proves the incoherence of the broker-dealer industry's core argument — that requiring all brokers to act as fiduciaries will prevent them from offering advisory services to low and middle-income savers.
The catch to that argument from Kitces' perspective: Brokers are not now advisors, nor can they legally put themselves out as advisors, so how can the DOL's rule prevent them from offering what they now can't legally offer?
"The '40 Act is a clear law. If you are giving advice for compensation, you have to register as an advisor," says Kitces, a partner at Pinnacle Advisory Group, a Maryland-based wealth manager, and publisher of an award-winning financial planning blog, Nerd's Eye View.
To Kitces (pronounced Kit'-sis), the Investment Company Act of 1940, which after multiple amendments over the years now has 65 sections, is clear in separating the roles of those who give advice for a living from those who sell products.
Were it enforced, the letter of that law is effective enough to regulate those two components of the financial services industry, believes Kitces.
"The whole point of the rule is to make sure the people primarily in the business of giving advice register as such," he explained. Doing so, of course, requires those advisors to act as fiduciaries.
"But when the broker-dealer and insurance industries say 'the DOL's rule will limit our services, and that will limit investors' access to advice,' then they are actually making the case that they should already be registered as advisors," he said.
And that's the argument that could get broker-dealers in "hot water," says Kitces, who could offer no good reason as to why the DOL and its supporters have not been making that point all along.
In effect, it is the brokerage industry's Catch-22: it is trying to block a rule using an argument that should submit them to the very law it is trying to avoid.
To be clear, Kitces has no quarrel with the fundamental broker model. In fact, he's for preserving it, another way of saying that he finds the DOL's effort "unnecessary."
"Brokers offer completely different services than advisors" when the lines are not blurred, said Kitces.
And the core services a broker offers are good for some consumers, who "should have the choice of doing a one-time brokerage transaction vs. getting, and paying for, ongoing advice."
The 40 Act's "solely incidental" clause, which protects brokers from fiduciary responsibility if the information they give is incidental to their core business of selling securities, would be enough of a firewall to protect consumers if it were properly enforced.
It is not the primary reason for why the fiduciary debate has become so frothy, says Kitces.
"How often do you see 'stockbroker' on a business card any more? You don't. You see 'advisor.' We've allowed the sales people to communicate to the public that they are in the business of giving advice. And then we have not held them accountable for doing so."
While no fan of the DOL's proposal, Kitces shares a perspective with those lobbying hardest on Labor's behalf: after years of the SEC's failure to adequately enforce the '40 Act, consumers can no longer tell the difference between broker and advisor.
