The DOL Rule is Dead

The DOL Fiduciary Rule is dead.  It went out with an unceremonious whimper last week.  Financial media sources covered the news almost no one cares about through short articles noting the progress that led to the death of the Rule sprinkling in a comment or two from sources who cared to opine on the subject.

The sparse commentary leads me to believe that finding those who supported the rule with vigor was likely a crowd no larger than enough to fill an elementary school cafeteria.  While some might suggest this is a blow to the American investor and a win for Wall Street corporations, I'd like to take a moment to point out our final (and I promise after this we are done) thoughts on the subject.

Fixing a Problem that Didn't Exist

While those who have followed us for years might know I have a formal background in Economics, my background expands well beyond just explaining an indifference curve.  I'm also a graduate from the public policy program at Syracuse (undergraduate, not the one that U.S. News gushes over) and spent a few years working on policy research gathering data to build models that helped shape public policy–and you all thought insurance was the most boring job I ever had.

Working on policy initiative numerous times in the past, I speak from experience when I say that policy implementation requires the identification of a problem.  The problem must be both identifiable and quantifiable.  For example, teenage drunk driving is bad because it killed 150,000 people last year (I made that number up for this example so don't bother looking it up to confirm), therefore we need to raise the minimum drinking age to 21.

The DOL never really identified a problem, at least not one that it could quantify in an attempt to explain why it was bad.  It noted (sort of) that advisors who do not work in a fiduciary capacity are allowed to recommend lesser (used in the most subjective sense possible) investment options that might be better for the advisor than for the client.  I'm taking a lot of liberties in interpreting claims with that last statement given my understanding of the industry as a whole.  In truth, the DOL was never that precise nor succinct.

The DOL then went on to claim that it could save American investors some fanciful sum that even taken at face value amounted to saving individual Americans less than $150 per year–the numbers become less impressive when you break them down into what they really mean.

Suggesting that financial advisors should act in a clients best interest and insinuating that they don't because the law doesn't require them to (only…actually…it does) doesn't identify a problem.

Additionally, telling me that your planned policy will save American's X amount of dollars per year collectively, doesn't quantify the scope of the problem, and I suppose the DOL never officially quantified the problem because it couldn't adequately get its hands around the problem to measure it.

The Plural of Anecdote…

The Plural of anecdote is not data.  I've uttered this phrase numerous times throughout my career when discussing various “research” on the topic of insurance and investments.  A story about your co-workers grandma who got “ripped off” by an ethics-challenged investment salesman does not constitute evidence proving that the financial services industry is broken any more than I can prove that all cops are addicted to donuts because I saw a cop car parked outside Dunkin' Donuts on my way home from the gym tonight.

No reporting I'm aware of ever spoke to the magnitude of the problem the DOL was seeking to remedy with its “Fiduciary” rule.  I suspect this is the case because no one had the figures to feed to the media.  It doesn't seem like data that would be unapproachable.  And you'd be hard pressed to convince me that had someone presented the figures of just how bad the current practice of financial advice was for your health, the financial press would not have shouted those figures form the rooftops.

A Win for the Legislative Process

In the end, the magnificence of the DOL Rule's death is in the display of American Government functioning properly.  The Courts ruled that the DOL overstepped its authority by implementing the rule. A notion that many of us called into question during the run up to the Rule's unveiling.

It appeared strange that the Department of Labor held the authority to suddenly dictate that practically everyone engaged in the business of selling investment products now had to follow a certain rule.

Does an Actual Problem Exist

The larger question at hand is: does a problem really exist?  Does the fact that not all persons engaged in the business of selling investment products are fiduciaries truly cause sizable harm to the American investing public?

I truthfully don't know the answer to that question.  As identified above, I'm aware of no data that captures such a problem.  While it's tempting to suggest that a threat might exist in the same sense that I lock my doors at night to keep unwanted strangers or guests out of my house, the truth is I have no data to support the suggestion that investors are systematically being hurt by the current system as it is–nor do I possess data that helps discern the risk of unwanted entry into my home.

So should we instead take a leap of faith and violate every rule I ever learned with respect to public policy design and implementation and just assume that because something sounds bad we must fix it?  It is my belief that such a paradigm sets the stage for an array of policy implementation we will likely come to regret.

The desire to control human behavior is not unique to investment advice.  It's the source behind several policy debates that range in terms of subject matter.  My understanding is that this initiative is extremely difficult to implement and often comes with several unintended consequences; therefore the collateral damage must be weighed heavily against the desired outcome.

About the Author Brandon Roberts

Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. A specialist in the design and application of life insurance cash accumulation features, Brandon is one of the foremost authorities on the subject of coordinating life insurance cash values in a financial plan.

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