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Editor's Letter: May 2015

Editor's Letter: May 2015

120 Pages of Gray

One axiom that seems unassailable in the financial industry is that Wall Street will always be steps ahead of the regulators in charge of governing it.

Forget for a moment the revolving door that moves individuals between the relatively low-paying regulatory agencies and the more lucrative jobs at the firms they ostensibly oversee, or the lobbying dollars that influence the politicians who are in charge of writing the rules.

Conflicts are not always clear-cut. The sheer complexity of financial services will give an edge to the firms whose responsibility is only to maximize profits. There will always be blurred lines and grey areas in regulations that will be exploited—that’s not always sinister; that’s the system. 

So in that context, it’s worth looking at the so-far relatively muted response of the industry to the Department of Labor’s second go around in proposing new fiduciary regulations for financial advisors to retirement accounts. 

With some exceptions, both fiduciary advocates and representatives from the brokerage industry can find things to dislike. It does put the fiduciary burden on almost anyone giving personalized advice to retirement plan investors. But as expected, it requires firms that may have conflicts to sign a “best interest” contract and disclose them. And the problems with mandatory disclosures have been well-documented. Under certain circumstances it allows for commissions and other fees; it carves out exceptions for platforms and education, and seems vague in delineating the line between selling and advice. Most notably, it allows aggrieved investors in IRAs the right to sue their advisors as opposed to resolving conflicts in arbitration.

So what problem is this really trying to solve? If there really is widespread institutional malfeasance in the current system—and I’m not convinced there is—these rules don’t seem to go far enough. If, however, the idea is to weed out those few advisors making a quick buck off their clients by intentionally selling them bad investments, it may be overkill.

Is this the rule that will drive broker/dealers away from the retirement market and leave smaller investors bereft of advice? Seems unlikely. In fact, on first read of the new proposals, I can foresee a new class of consultants arising meant to help advisors—many of whom are dually registered—“transition” their practices to the new regulatory reality. 

I grant that regulation is a tough business, and the fiduciary issue has real consequences to advisors and investors. But I’d suggest that any rules requiring 120 pages to explain, as well as over 500 pages of exemptions, introduces complexities, caveats, exceptions and subjective interpretations that either waters down the standards it’s meant to uphold, opening up grey areas to be exploited, or, seen from another angle, puts a useless but costly burden on the stakeholders involved. Either way, no one seems to win.

David Armstrong


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