Financial planners who embrace a fiduciary standard have been staunch allies in defending the Department of Labor’s fiduciary rule and fighting to extend its strong protections to all investment accounts. In contrast, lobbyists for broker-dealers have fought for a standard that allows brokers to say they are subject to a best interest standard without actually having to change any of their harmful business practices.

That second message was on display in Mark Elzweig’s Dec. 20 Voices column, “Fiduciary rule should be decided by Congress,” in which he argues that Congress needs to step in to clean up the “mess” the Labor Department rule is causing. Elzweig ignores evidence of the rule’s many beneficial effects — reductions in conflicts, improved product menus and availability of fiduciary advice to even the smallest of accounts — in order to claim that investors are being harmed.

He even points to concerns raised by the Consumer Federation of America about brokers’ inappropriately switching customers into higher cost fee accounts as evidence of that harm. As our letter to Labor Secretary Alexander Acosta makes clear, however, this harm is caused by the Labor Department’s failure to enforce the rule, not by the rule itself.

Instead, Elzweig suggests that harmful effects of the rule are the inevitable result of trusting regulatory decisions to regulators and nonprofits, “who have no skin in the game.” It’s better, apparently, to leave policy decisions to the industry groups that profit from the harmful practices regulations would curtail and the politicians who benefit from their campaign contributions.

(Bloomberg News)
(Bloomberg News)

All of which leads Elzweig to support legislation from Rep. Ann Wagner, R-Mo., which has been lauded by broker-dealer and insurance lobbyists and which Elzweig claims provides a “common-sense best-interest standard for broker-dealers.”

There is a hole in Elzweig’s logic, however. The Wagner bill has been opposed, not just by investor advocates like CFA, but also by major financial planner and investment advisor associations including IAA, FPA, NAPFA, and CFP Board. Their members are uniquely qualified to comment, as they have considerable real-world business experience applying a fiduciary standard in a variety of advisory business models.

In its opposition letter to the Wagner bill, the Financial Planning Coalition wrote that the bill’s “vague statutory framework… amounts to nothing more than an inconsistent suitability standard” and “will only lead to diminished investor protection and increased investor confusion.”

Ironically, the Consumer Federation of America seems to have more faith in the brokerage industry’s ability to develop a pro-investor approach to commission account than either Elzweig or the industry’s own lobbyists.

In fact, CFA has long acknowledged that commissions are no more inherently conflicted than other forms of compensation. That view is reflected in the Labor Department rule as well, which permits commissions, but seeks to rein in all the other problematic conflicts industry has built into commission accounts — things like sales quotas and, on the insurance side, sales contests with lavish trips as rewards, retroactive ratcheted payout grids that ratchet up the conflicts as brokers approach the next payout level and compensation differentials that mean brokers can earn two, five or ten times as much selling one investment product over another.

Eliminating these practices, which encourage brokers to make recommendations based on their own financial interests rather than customers’ best interests, has the potential to make commission accounts an attractive option for investors, albeit a far less profitable option for those brokers who have exploited loopholes in the fiduciary standard to push high-cost, opaque and illiquid investments on their unsuspecting clients.

Unfortunately, the benefits of the Labor Department rule have been put on hold while the department gives special interests one more chance to make their case for weakening the rule. As responsible industry groups like the Financial Planning Coalition have made clear, that would be bad for investors and bad for the profession.

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