I might not be a lobbyist or a politician, but I do know a little bit about history. I seem to recall a very divisive issue once faced by our government. Before it was ultimately decided, legislators agreed to a series of compromises. These agreements placated both sides of the argument – at least for a while.
The wheels of ideation began churning when I interviewed Harold Evensky last week (see "Exclusive Interview: Harold Evensky says Robo-Advisors 'Roadmap to a Rocky Future'," FiduciaryNews.com, July 22, 2014). He described his "You" test as a way to define whether a fiduciary relationship exists. He wanted that to supersede any title or business model when it comes to triggering a service provider's fiduciary duty.
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With the concept of the You test percolating in the back of my mind, the spirit of compromise struck me the other day when reading comments from Oklahoma Congressman James Lankford. He told us how, before he was rich, he was poor. And, among the first things he remembers about being poor was the kindly broker who came to offer advice. I conveniently disregarded the fact that, given Lankford's age, the era of his poverty occurred well before the advent of the "Merrill Rule" and dual registration, i.e., before it was legal for brokers to lead with the offer of investment advice. No, instead, I followed his reasoning without comment.
And that's when the compromise idea struck me.
Lankford and the broker/insurance lobby claim smaller investors will lose out on the benefits of advice if all advisors were required to obey the rule to always put the client's interests first (i.e., the fiduciary standard). To date, everyone's been arguing the issue of the fiduciary standard regarding the small-client market. For the sake of the argument, though, let's go with this line of reasoning for the moment.
Do you know what this argument really means? It means there's universal agreement that investors not in the small-client market would not be harmed by the fiduciary standard. By arguing for the small-client market, industry lobbyists imply there is no issue with the fiduciary standard for everybody else.
So, in the spirit of compromise, here's what I propose: We adopt the full unadulterated "pure" Fiduciary Standard for everyone except the small-client market. By "full unadulterated 'pure'" Fiduciary Standard, I mean no exemptions, no disclosure requirement, quite simply, a fiduciary standard that prohibits all forms of self-dealing and transaction-based fees. It is my understanding, based on the arguments of those against the fiduciary standard, the issue resides only within the small-client market. Therefore, there should be unanimous agreement this pure form of the fiduciary standard can be applied to all other markets.
Now that we've agreed to who we all agree we can apply the fiduciary standard to, what remains is merely determining the definition of the small-client market. Obviously, this should be based on assets. We can easily narrow this possible range down. Since we know traditional private portfolios (those that contain stocks and bonds) can be managed as low as $200,000; and since we know registered investment advisors and bank trust officers are the only providers who can legally obtain the limited power of attorney necessary to manage private portfolios; and since we know those two types of providers already fall under the legal definition of fiduciary; ergo, we all can agree that the small-client market can be defined as anyone possessing no more than $200,000 in assets. This defines the high side of the range.
The low side is a little trickier, since many, like Evensky, argue that there is no low side. They maintain everyone can easily be charged a fee independent of investment products. But, as you recall, we're going with the lobbyists on this one. It seems like, given the examples I've seen, a good low number to pick would be about $50,000 in assets.
There you have it. The small-client market will be defined as anyone with assets from 0 to at least $50,000 but not more than $200,000. I'll let the lobbyists earn their money by making a case for exactly where this cutoff should be.
So that's that. I call it the Great Fiduciary Compromise of 2014. I call on Congress to pass it, the president to sign it and the regulators to figure out how to enforce.
Any questions?
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
