One Man’s Solution to the Fiduciary Conundrum

Beth Jones, RLP®, AIF®, CFT™ |

By Charles Goldman, AssetMark
President, CEO
Published in Barron's Feb. 12, 2017

With the Trump Administration’s pending delay in implementing the Labor Department’s fiduciary rule, we may finally have a chance to fix the regulatory morass consumers face when receiving financial advice. The delayed DOL rule, which had been slated to take effect in April,
did a terrific job of introducing the concept of fiduciary duty to everyday investors. But there’s a simpler, more effective route to
industrywide adoption of the standard.

First, let’s define the problem. For decades, regulators have maintained two different standards of care—one for brokers and one for registered investment advisors, or RIAs. Brokers are held to a suitability standard, meaning they must put their clients in investments that are “suitable” to their goals and risk appetite. Brokers also can pick investments that pay them more than an equivalent option, which is clearly not in the clients’ best interest. RIAs are held to a fiduciary standard,
which requires that they put their clients’ interests ahead of their own. The fiduciary standard requires, by law, that the investment is not only suitable, but also cannot enrich the advisor at the client’s expense.

The issue that remains is how to enact fiduciary regulations that will allow the standard to be implemented and enforced industrywide. The good news is that we already have a battle-tested regulation that does just that, the Investment Advisers Act of 1940. It currently governs RIAs and is the gold standard of investor protection. The act says simply that advisors have a duty of care to put investors’ interests ahead of their own, and a second-and-equal duty to avoid conflicts of interest and, where conflicts exist, to disclose them in writing to their clients.

The bad news, of course, is that the Act of 1940 does not apply to brokers. Also, the DOL rule applies only to retirement accounts and creates an alternative definition of “fiduciary” with a mountain of requirements and exemptions. In short, the DOL rule complicates an issue that is in desperate need of simplification.

There are many reasons to care about this issue. First, investors deserve financial advice that is as free of conflict as possible. Second, confusing and complex regulations are costly to implement and maintain. Third, the burden of managing so many different regulatory approaches will fall on already-strapped government agencies.

So what can be done? The new head of the Securities and Exchange Commission should do what Congress wrote into law after the 2008-09 financial crisis in Dodd- Frank: Implement a common fiduciary standard for delivering financial advice to individual investors. And that common standard should be the Act of 1940. Simple, right? Well yes it is.