It may sound like heresy, but expanding the fiduciary standard is not in the best interest of consumers. Why not? Think beyond the typical mass-affluent client. What about those with limited incomes, no resources to pay for a financial plan or not enough assets to meet the minimum requirements for a fee-based account? Those families are the ones about to get crushed by regulators who haven't done their homework.
The Department of Labor finally realized its fiduciary rewrite was going to backfire and postponed rules that could have decimated access even to IRA advice. As I see it, regulators are slowing their fiduciary campaign for two reasons: the cost-benefit analysis of their proposal is nonexistent and they may realize the damage they were about to inflict on average investors. There is no clear evidence of consumer harm and no defined problem these regulators are trying to solve.
You may wonder why anyone would find anything wrong with requiring every financial professional to act in the best interest of clients. After all, most successful reps and advisors do that now.
Regulating, overseeing and litigating such a standard, however, is a different proposition. Explain how a professional selling a variable insurance product will be evaluated under the best interest definition. Will market conditions viewed in hindsight dictate which type of product the representative should have sold at any given point in time? Over what horizon will the evaluation be made, and by whom? How will a regulator know if a product is in a client's best interest before the sale?
The result will be to drive more financial services professionals into a fee-based model. While Dodd-Frank does not require that change, it will be the practical response from a compliance-weary crowd. According to senior executives at several top firms, the shift is already happening as professionals try to get ahead of whatever the Labor Department and the SEC ultimately do.
Sadly, it will be average investors who lose - all those for whom a fee-based arrangement is impractical or impossible. Instead of trying to codify unattainable ideals, why aren't regulators focused instead on the quality of financial advice?
There is great benefit in more education and training through top-quality designations, such as certified public accountant, chartered life underwriter, certified financial planner, chartered financial analyst or chartered financial consultant. Instead of taking the significant risk of reducing access to advice for the consumers who need it most, here's a different idea: Raise the quality of advice for all consumers.
Laurence Barton, Ph.D., is president of the American College in Bryn Mawr, Pa.
