Ron Rhoades of ScholarFi Inc. in Alfred, N.Y. and the former incoming chair of NAPFA, said O'Hanley's arguments "lack substance and ring hollow" and submitted the following response.
Rhoades concluded: "The only thing that is limited by the fiduciary standard is the greed of Wall Street."
Give it a read and we encourage you to respond below with your thoughts on the pontential ramifications of the fiduciary standard.
Wall Street is unleashing its attack dogs to try to stop the EBSA from re-releasing its proposed rule, "Definition of Fiduciary." Wall Street's lobbyists are out storming the Administration, and particularly the Office of Management and Budget (through which the rule must first pass, before it is released). And Wall Street, with its millions of millions of campaign contributions, is seeking support from Congress as well.
In an April 10, Financial Planning article the author quoted Fidelity's Ronald O'Hanley as stating: "The effect of this rule was clear: It would have shifted the legal line between investment advice and education, and thus dramatically curtail the valuable education and guidance investors receive today. The real outcome of this misguided proposal would be no education and no guidance for average and low-income Americans. They are the ones that are going to get hit most by this."
As readers are likely aware, the Department of Labor's Employee Benefits Security Administration is likely to re-propose, this year, an expansion of the definition of "fiduciary" under DOL rules to encompass nearly all providers of investment advice to ERISA plans. In addition, under statutory authority already granted to it, it is likely to require that advice provided to IRA accounts also fall under ERISA's tough fiduciary standard. Of course, Wall Street and the insurance companies are opposed to this rule, for it would negate their ability to extract excessive profits from investors big and small.
This is not the first time Wall Street has played this card - i.e., threatening to leave individual investors "stranded." Each time Wall Street's business model, in which conflict-ridden investment advice is challenged, it THREATENS that the proposal would end services for "average and low-income Americans."
As if that would be a bad development! I say - let them end services!
As discussed below, Wall Street's rhetoric is an empty threat. There will be many, many advisors to take their place - and in the process of doing so individual investors and plan sponsors will receive better, higher-quality advice for far less in total fees and costs.
FIDELITY'S ILLOGICAL POSITION IS UNFOUNDED, SELF-INTERESTED, AND GOES AGAINST SOUND ECONOMIC PRINCIPLES
Fidelity, through its executive, asserts that our fellow Americans will not be served if the fiduciary standard is applied. This is a HOLLOW statement.
Wall Street's whining and attempts at obfuscation ignore fundamental economic principles. In 1970, Nobel-Prize winning economist George A. Akerloff, in his classic thesis, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug., 1970) demonstrated how in situations of asymmetric information (where the seller has information about product quality unavailable to the buyer, such as is nearly always the case in the complex world of investments), "dishonest dealings tend to drive honest dealings out of the market." As George Akerloff explained: “[T]he presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.”
In other words, as long as Wall Street is able to siphon excessive rents from investors, through conflict-ridden sales practices resulting in higher costs for individual investors (and lower returns), the business model Wall Street seeks to preserve will continue to attract bad actors. It's only human nature ... "join our firm and your compensation potential is virtually unlimited" is Wall Street's "promise" - ignoring of course the requirement that the new employee is required to sell - not only expensive and often proprietary investment products, but indeed his or her very soul.
ENHANCED STANDARDS OF CONDUCT WILL FUEL DEMAND, SUPPLY AND QUALITY
What will happen if the fiduciary standard is applied to the delivery of advice to all plan sponsors, plan participants, and individual investors, through potential DOL (EBSA) and SEC rule-making? Economic principles and common-sense logic indicate that three dramatic developments will occur.