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Dan’s new book for millennials, Wealthier: The Investing Field Guide for Millennials, is now available on Amazon.
I support the efforts of The Institute for the Fiduciary Standard to subject all those providing financial services to a fiduciary standard of care.
The Department of Labor has embarked on a “fourteen-year-old quest” to define fiduciary status. Its latest effort is outlined in its Retirement Security Rule, published on April 25, 2024, which defines an investment advice fiduciary.
The new definition of fiduciary is specifically tailored for employment retirement plans. According to Morningstar, a fiduciary is "anyone who holds themselves out as a trusted advisor when providing advice...”
The Morningstar article predicts the new rule’s impact will save participants in small plans “over $55 billion in the first ten years and over $130 billion in the subsequent ten years, in undiscounted and nominal dollars.” It also predicts additional savings for retirement investors rolling into fixed-index annuities of “...over $32.5 billion in the first ten years and over $32.5 billion in the subsequent ten years, in undiscounted and nominal dollars.”
I’m skeptical.
Complexity
Understanding how to act ethically and appropriately as an advisor is apparently no easy task.
The new rule, spanning over 500 pages, continues the tradition of transforming a straightforward matter into a convoluted one.
The SEC’s Regulation Best Interest, which required broker-dealers to mitigate certain conflicts of interest, is only four pages long. Still, it required nearly 800 pages of “guidance” on how the SEC interprets it.
The subtitle to both Rules should have been A Full Employment Act for Lawyers.
Lawyers are already establishing themselves as experts in deciphering the subtleties of both Rules, as indicated in this article on the Retirement Security Rule. This one on Reg B1 notes that “...once one digs into the the nearly 800 pages of guidance on how the SEC interprets Reg. B1, the layers of complexity become apparent...”
Complexity benefits bad actors
Complex laws often benefit bad actors with deep pockets. They have the resources to hire lawyers and experts to navigate the complex legal framework and find loopholes. A veil of legal complexity and technicalities can serve to shield unethical behavior.
Examples abound.
Look at tax behavior by large corporations. These corporations often have a team of tax lawyers and accountants who can navigate the complex tax laws and find ways to minimize or avoid taxes altogether. As a result, they end up paying very little in taxes, while small businesses and individuals bear a disproportionate burden.
Another example is insider trading. While insider trading is illegal, the laws governing it are complex and challenging to enforce. Wealthy individuals with access to privileged information can often get away with it, while small-time traders are likelier to be caught and punished.
Investment banks can use complex derivatives and other financial instruments to hide risk and engage in risky behavior while technically complying with regulations. This was one of the critical factors that led to the 2008 financial crisis.
Good intentions, flawed premise
While laws and regulations can help promote ethical behavior, they are not a foolproof solution. There are laws against bank robbery, but there are still bank robbers. Similarly, there are laws against fraud, but fraud still occurs in many industries.
There is no confusion over the definition of the fiduciary duty registered investment advisors owe their clients. A clearly defined standard of care hasn’t stopped some RIAs from violating this duty.
Wealthier:
The Investing Field Guide for Millennials.
Why have so many financial advisors agreed to review an advance copy of Wealthier: The Investing Field Guide for Millennials. It empowers millennials to be responsible DIY investors and financial planners. You can see some of their reviews here.
Dan’s new book for millennials, Wealthier: The Investing Field Guide for Millennials, is now available on Amazon.
Here’s what one advisor said: "Saplings grow into trees. We need to help the next generation of investors get to where they need our services."
For more information, visit the website for Wealthier:
To review Wealthier send an e-mail to: [email protected]
Laws against these behaviors will deter some and provide a clear legal framework for punishing those caught. Laws and regulations can set ethical behavior standards and guide what is expected of individuals and organizations.
Ultimately, ethical behavior is a personal choice. No amount of legislation can guarantee it.
A better way
Educating consumers about financial advisors empowers them to make informed decisions and protects them from potential fraud or misconduct.
To ensure that a financial advisor is acting in their client’s best interests, consumers should ask for the following simple set of representations (which I call “the Solin Standard”) in writing:
Fiduciary duty. Financial advisors should acknowledge in writing that they have a fiduciary duty to always act in their client’s best interests. Advisors should commit to this simple statement of care: “I will always put your interests above mine.”
Conflicts of interest. Financial advisors should disclose in writing any conflicts of interest that arise during their relationship with a client and agree to resolve them in favor of the client.
Compensation. Financial advisors should disclose in writing how they are compensated for their services, including any commissions, fees, or other incentives.
Dispute resolution. Financial advisors should agree not to impose mandatory arbitration on clients.
Tell your clients that you adhere to “The Solin Standard.”
It doesn’t take 800 pages.
Dan coaches evidence-based financial advisors on how to convert more prospects into clients. His digital marketing firm is a leading provider of SEO, website design, branding, content marketing, and video production services to financial advisors worldwide.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
Here’s what one advisor said: "Saplings grow into trees. We need to help the next generation of investors get to where they need our services."