Last week's victory in Congress for the Department of Labor's Conflict of Interest (COI) Rule is the best news for fiduciary advice since the March 30, 2007 FPA victory over the SEC in the so-called Merrill Lynch Rule. While opportunities remain in 2016 and beyond for opponents to derail the rule, against overwhelming Wall Street lobbying the COI survived.
The question becomes whether the COI Rule success is a one-off win – or a leading indicator of a broader movement toward fiduciary advice. Some evidence suggests COI has planted important seeds. Market forces and unprecedented media coverage have raised awareness of the harms of conflicts and excessive fees. The divide between financial firms' opposition and advisers and brokers support is becoming increasingly clear. Further, fiduciary advisors have come together to advocate for fiduciary advice.
Here are a few developments which portend a growing movement.
1) Increasing Awareness of Fees and Expenses
Research has long shown many investors do not know what they pay in fees/expenses and many investors even believe they pay nothing at all. These investor misconceptions are important and why attention to investment costs matter. Attention reminds investors investment services are not "free" and spurs them to ask financial firms and advisors questions.
Reporting on fees and expenses has also focused more attention on automated digital brokers (aka: robo advisors). Robos have been a big industry story and well covered by personal finance columnists. HNW investors, led by millennials, have noticed. Research firm Capgemini reports that 87% of under 40 HNWI's "expect all or most of their wealth management relationship to be conducted digitally in the next five years … (and) nearly 50% of HNW investors over 40 HNWI's also preferred digital channels."
2) Opposition Undressed
Fiduciary opponents defend their position with several specious arguments. The most notable: the rule would deny small investors access to "quality affordable retirement advice." The claim is nonsensical but remains the cornerstone of anti-fiduciary advocacy.
Does this claim still matter? Financial lobbyists testified in August at DOL hearings and expressed resounding support for a best interest standard. Some dug into the COI rule to demonstrate why BICE requirements are "unworkable," and raised valid technical points for streamlining the rule. Fair enough. Then something odd happened. Under sharp questioning some lobbyists went off their standard script and essentially conceded a huge point. About contractually binding their firms to fiduciary duties, the lobbyists seemed flummoxed. They struggled, unable to provide straight answers as to why they could not embrace fiduciary requirements. There were no clear explanations for why they could not sign a fiduciary contract and agree to standards of impartial conduct or agree to charge reasonable fees. This overriding image of exasperation and evasiveness is powerful video.
3) Broker Support
Meanwhile, brokers who work directly with investors beg to differ with their firms. And strongly so. They fundamentally reject the central idea advanced by financial firm lobbyists that the BICE is "unworkable." In an Institute for the Fiduciary Standard / Wealth Management survey of brokers and RIAs, brokers found key BICE requirements to be, in fact, reasonable. Brokers believe to "Contractually acknowledge fiduciary status" is reasonable, 47 to 33% (20% neither) and to "Receive no more than reasonable compensation" is reasonable, 54 to 17% (30% neither).
4) Advisor Action
