I Dare You

One of the more amusing policy rumors we’re hearing about how Trump will handle the financial sector involves the rollback of Department of Labor’s now passed Fiduciary Standard rule, obligating brokers and financial advisors to put the wellbeing of their clients ahead of their own compensation desires. As someone who spent a decade doing pure retail brokerage, I cannot emphasize enough how sorely this change in care was needed.

The brokerage lobby fought this rule tooth and nail but it didn’t work. And as a result, the industry set about remaking itself to comply, albeit reluctantly.

But with the coming of the new administration and a congress wholly controlled by the same party, there is a belief that the Fiduciary Standard will be taken out back and shot.

To which I say, “I dare you.”

If you’re a brokerage executive with quarterly profits on your mind 24/7, it might feel good for the moment to re-stock the Augean Stables with high-commissioned, heavily conflicted muck. But when that moment passes, those who cannot or will not adapt to the now de facto standard that is fiduciary advice will eventually lose in the end, regardless.

Because the customers are now more educated than ever. Millions of people reading blogs like this one and having their eyes opened to the many traps that have been set for them over the years. Persistence studies and survivorship bias and the effect of high costs and the problems with portfolio-related tax incursion and so on. We’ve been relentless because we believe there is right and wrong, despite the fact that not every person should be shoehorned into an identical service model. There is room for commissions and for fee-based asset management to co-exist. But a standard of care that prefers the customer to the salesperson ought to be the barest of bare minimums that the public expects from our industry.

That said, the genie has been let out of the bottle anyway.

Customers have been voting with their feet in the eight years since the financial crisis. They’re rejecting high-cost, low reliability solutions with their dollars. They’re turning their backs on feigned expertise and the sort of institutionalized opacity that has kept them guessing about what they’re actually getting for their money all these years. Look no further than the monthly, quarterly and annual fund flows to see this phenomenon writ large, to the tune of trillions of dollars washing away. Look to the rise of software-enabled entrepreneurs in the investment advisory business, coast to coast, who are turning the Old World’s conflicts into the New World’s opportunities.

You can roll back a rule, but you can’t put up a wall in front of a typhoon of this magnitude, can’t block a zeitgeist of this velocity.

You’re welcome to try, however. To pretend as though the most horrendous lie on Wall Street hasn’t been thoroughly debunked by innovation, ingenuity and the conscientiousness of a new generation of financial advisor.

The secret is out. Just this week, yet another case of the investment industry’s employees saying that their products are more fit to be sold than to be consumed internally. The employees of Wells Fargo are following in the footsteps of many other fund industry workforces and suing their parent company for its own products’ lack of efficacy.


Wells Fargo & Co faces a new U.S. lawsuit claiming that it funneled more than $3 billion of employee retirement savings into expensive, underperforming proprietary mutual funds to enrich itself.

The proposed class-action lawsuit, filed on Tuesday in federal court in Minnesota, accused the third-largest U.S. bank of “self-dealing and imprudent investing” by steering 401(k)contributions to its Wells Fargo Dow Jones Target Date funds.

The lawsuit, filed by employees led by John Meiners, from St. Louis, seeks to recoup excess fees and unrealized profits stemming from Wells Fargo’s alleged breach of fiduciary duties to all 401(k) participants over the last six years, the complaint said…

According to the complaint, Wells Fargo’s target date funds cost 2.5 times more than similar funds from such rivals as Fidelity Investments and Vanguard Group.

In other words, How Dare You Make Us Eat Our Own Cooking? 

I discussed the insanity of this in July when a similar suit hit the American Century mutual fund firm from its own employees:

Car dealership. You are being persuaded to buy a Ford from a Ford dealer. You ask him if he drives a Ford. “Hell no. I drive a Chevy,” he tells you.

Restaurant. You go back into the kitchen and ask the chef if he eats his own dishes. “Never,” he replies, slamming shut the top of a trash can filled with fast food wrappers from the burger joint down the street.

These little vignettes are inconceivable. Imagine a homebuilder who wouldn’t raise his family under a roof that he himself had raised. A fitness instructor who doesn’t do his own workouts. A nutritionist who swears by someone else’s diet plan rather than the one she recommends to her clientele.

Say what you will about hedge fund managers, but, at the end of the day their net worths and livelihoods depend almost entirely on their investments in their own funds. The same is true of private equity titans and the CEOs of most public companies. To sell a fund product to ordinary investors while simultaneously griping about having to use it for your own retirement is truly beyond the pale. Fund companies need to improve the quality of the products they sell and make them more in alignment with the fiduciary standard of care that all investors will soon be coming to expect. There is no other solution, rule rollbacks or not.

I want to finish with the words of Vanguard’s Jack Bogle, and his take on the Fiduciary Standard as recorded in a brand new interview last week with Bloomberg’s Michael Regan. His attitude on the topic almost perfectly matches mine:

Michael Regan: Let’s talk about the Department of Labor’s fiduciary rule, which will soon require broker-dealers and advisers to take clients’ “best interests” at heart in regards to retirement accounts—unless a President Trump moves to repeal it, as some expect. What’s your pitch to him in the Trump Tower elevator?

Jack Bogle: I’m happy to have the fiduciary rule, but think about this for a minute: It doesn’t really matter in the long run whether there’s a fiduciary rule or not. With each passing day, shareholders get better educated, and they will move their money to people doing things right and serving them properly and away from people who are doing it wrong. That is crystal clear to me. I think we need the rule, but if the rule goes, we will fall back on the very essence of capitalism. What Adam Smith wrote way back in 1776 in the Wealth of Nations: The sole role of the producer—or money manager, in this case—is to serve the consumer.

Like Jack, I won’t lament the dissolution of the rule if that is what ends up happening. Because those who live up to the spirit of the thing have been winning, are currently winning and will continue to be winning, so long as the public is free to choose.

And they are.


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