Would the Fiduciary Standard Actually Increase Investor Returns?

Who’s Afraid of Placing Investors First?

Registered investment advisers have been fiduciaries for decades, working in their clients’ best interests under the Investment Advisers Act of 1940, and ERISA. In fact, there are 11,400+ fiduciary RIA firms advising or managing $67 Trillion in assets for 30 million investors large and smaller, in retirement accounts and outside of them. They employ 750,000 individuals.

So why is it that some in Congress, and less progressive firms in the financial services industry – the less progressive insurance, mutual fund, broker-dealer and banks – and their lobbyists, are so afraid of having to place the best interests of investors first? Why do they say it’s unworkable to be a fiduciary?

Clearly, it’s not unworkable at all, as fiduciaries have demonstrated for decades. It’s actually a better – and more sustainable model. Better for investors – bigger retirement nest eggs are one demonstrable example. And better for firms that culturally and professionally embrace it.

Those opposing the DOL’s Fiduciary rule update say smaller retirement plans or investors won’t get advice.

Really? Are these investors getting bona fide advice in their best interest now, from these non-fiduciary firms? Clearly not – because of they were, these firms/lobbyists/ and some members of Congress wouldn’t be spreading lies about the DOL Fiduciary Rulemaking.

“It seems to me that it's difficult, if not impossible, to find someone who is against the fiduciary standard who doesn't have a financial interest in some fashion,” said James Osborne, president of Bason Asset Management in Investment News.


Clearly, advice in the investor’s best interest leads to better investor – and firm – outcomes. Advice in the investors’ best interest not only leads to higher returns for the investor – in part because the advice and investments, all-in, cost less.

University of Chicago Economics Prof. Mark Egan as studied this. He writes: “I find that holding brokers to a fiduciary standard over the period 2008-2012 would have increased investor returns by as much as 2.73% per annum.”

WOW! That’s huge!

Many representatives in the not-yet fiduciary firms want to put investor’s interests first, and do – to the extent that they can. But they basically swim upstream as they try to act in investors’ best interest, limited by what their companies allow on their platform, (often conflict driven – whatever makes the most revenue for the company and rep or agent) and how they are graded and paid, based on sales “production.”

One of the biggest changes with the upcoming DOL Fiduciary Rule is that reps and firms will finally have the regulatory backing and requirements to actually put the investor’s best interest first. Firms that didn’t before will now have to support fiduciary behavior and culture, and reps who have been swimming upstream to act in investors’ best interest will have more, reasonable cost products to choose from. They’ll be paid for bona fide fiduciary advice rather than how many product sales they make.

Many of the progressive firms and financial intermediaries across a variety of business models are preparing to meet updated rules from Department of Labor Fiduciary Standard for those working with retirement investors. These progressive firms and reps are getting fiduciary training and putting in place processes that will help them make the transition to new fiduciary requirements .

These progressive firms are developing lower cost investment solutions to help their reps and agents meet the new rules.

Culture will change at more progressive firms because you cannot base professionals’ compensation and evaluations on the current insurance, fund and brokerage metrics of sales “production” and “distribution of product.”

And also because regulators, including FINRA, DOL and SEC, are looking into firms’ culture and “sales practices.”

The “product” of the new fiduciary financial professional becomes bona fide, fiduciary advice, financial planning and improved client outcomes. And longer-term client relationships based in trust, not deception.

By the way, firms’ compliance costs COME DOWN when the culture at the firm pivots from sales and distribution to client-focused better outcomes, sound professional practices . Oh, and by the way, a steadier revenue stream for advice at a reasonable cost, rather than products that gouge investors.

But less progressive firms and their lobbyists are still spreading untruths about the impact of the rules. That’s a huge disservice to investors and also to financial representatives who are not required to act as fiduciaries now, but will be. Scaring your employees with lies is uncool.

Don’t Be Fooled By the Lies of Those Who Base Their Model On Deception and Gouging the Investor.

The fact is that there has been a trend toward the fiduciary model and professionalization of the financial services industry, for many years. Research shows that many financial intermediaries – even when they are not required to – want to place the best interests of their clients first. And in terms of what’s good for reps and firms, acting in the investors’ best interest leads to better investor results. Better results mean happier and longer-term client relationships – and client retention is a lot less labor intensive and loads less expensive than client acquisition, right?

And let’s face it, for sales and distribution firms, because they are not yet held to the fiduciary standard of placing investors’ best interests first, it’s often what makes the company the most in revenue) the way success is measured at broker-dealers, insurance and mutual fund companies and banks, and the sales and distribution culture at those companies. They are measured by how much securities or investment products they sell. Their compensation is based on that – commissions and fees are the highest, often for the most illiquid and risky products. If they sell more of those high-risk, illiquid products, they are paid more.

They are not paid to place the investor’s interests first, diversify investors’ assets and provide advice in the best interest of investors.

Here’s the thing.

The all-in investment costs to an investor matter . They matter a great deal. That's why they are part of a fiduciary's obligation. We’re not talking just about the most horrific annuities or non-traded REITs and their heinous but typical 7% or even 12% or more upfront commissions, and ongoing costs that can range from 4% annually and 20% surrender fees. Or that they frequently are sold into IRA accounts, where they typically don’t belong and harm the beneficiary.

According to Burton Malkiel and David Swensen, just 2% in extra costs per year cuts a retirement investor’s nest egg by 50%. Just 1% extra per year cuts it by 28%.

DOL’s Fiduciary update is long overdue. Congress must support it and the financial services industry should embrace it.