We tried not to talk about the Department of Labor's proposed rule change regarding retirement accounts. I promise. We had a conversation where we specifically decided we weren't going to do it.
But then we did.
There are times that no matter how much we'd like to talk about something else we can't. This story has really taken on a life of its own.
And the more we hear from those who support the rule change, the more we feel compelled to jump into the fray.
Why bother? Because the Department of Labor (deliberately or not) is proposing a change that will have consequences far beyond the matter at hand.
Secretary of Labor, Thomas Perez, has proposed a rule change that says any advisor that provides advice to a person regarding their retirement account (401k, IRA, etc.) will be required to act in a fiduciary capacity.
What is a fiduciary? What does it really mean?
Well, here are a few definitions from around the interwebs:
An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. Therelationship wherein one person has an obligation to act for another's benefit. TheFreeDictionary.com
A fiduciary duty is a legal duty to act solely in another party's interests. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principals' express informed consent. They also have a duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries' other clients. A fiduciary duty is the strictest duty of care recognized by the US legal system. Cornell University Law School
A fiduciary duty is an obligation to act in the best interest of another party. US Legal
All of those definitions seem reasonable right?
And I don't think there's anyone (including us) who would say that acting in this capacity is a bad thing. Matter of fact that's why this proposal has gotten legs.
So why do we feel compelled to go on about this?
Because every discussion and the congressional testimony has focused around imposing the fiduciary standard to force lower costs on investments held in retirement accounts.
That's it. Secretary Perez and company are holding out the new breed of “robo advisors”–like Wealthfront as beacons of light in an otherwise dark and dirty world. I can't say if Wealthfront or any of the other companies providing similar offerings are doing it right.
Time will tell. They've only been around a few years.
But they are heralded because they are able to provide “financial advice” at a low cost. That's great. No problem with that.
That's the business model they've chosen. However, there's more to acting as fiduciary than having people answer a few questions and then not charging them very much to render an opinion and/or manage their investments.
And why are government officials pointing to a specific Registered Investment Adviser (Wealthfront) as an example. Is that not an endorsement? Implied or otherwise.
See the picture at the top of the post–that's Secretary Perez and Wealthfront CEO, Adam Nash, posing for picture at Wealthfront HQ. The picture was then posted to Twitter–by the Labor Secretary.
The dept. of labor also points to Vanguard as a shining of example of a mutual fund company who's doing “right” by it's clients. We like Vanguard.
They're pointed to as an example of an exemplary low-cost provider. They have an expense structure that people supporting this rule change favor.
And we agree, Vanguard is a fine purveyor of low-cost investment options.
But what does that have to do with applying the fiduciary rule to everyone who gives advice regarding a retirement account?
Those in support of this rule change seem to be confused. They are equating “the obligation to act in the best interest of another party (your client)” with lower fees?
Look back at the three definitions of fiduciary above. Do you see any mention of fees, costs or anything specific at all?
No. You don't.
And believe it or not, just because one investment option is less expensive than another doesn't mean it's better. It may be but as a person acting in a fiduciary capacity that's not your only consideration.
Why do we care?
Put on your tin foil hat for a minute. Because as we've seen over and over and over the unintended consequences of making rules matters. They can do more harm than good.
If the Department of Labor gets its way, the fiduciary standard will be re-defined to mean that “you must act in your client's best interest at all times and that means they must always have the lowest cost option“.
The point of the fiduciary standard is that the person who has accepted the fiduciary duty is going to do his/her best to act in the best interest of their client. That's it.
Taking into account everything that you know about this person, where they want to go, what the money is intended for, based on their circumstances–what's best for them. It's an ethical standard, not a mathematical one.