After lobbying hard for the fiduciary rule, consumer advocates clearly do not want to be blamed for the adverse consequences that are now becoming crystal clear.

Maybe commissions aren’t so evil after all?

All along, industry participants predicted that the rule would accelerate the disenfranchisement of smaller investors and restrict investor choice, and now that's exactly what's happening.

Advocacy groups like the Consumer Federation of America now gripe that some advisors are inappropriately shifting customers into more expensive fee-based accounts as opposed to cheaper commission-based accounts. And yet the fiduciary rule (for which they advocated) makes doing commission business in retirement accounts a risky proposition both for firms and advisors. So now that the ill effects of the rule are apparent, they profess to be advocates of cheaper commission-based business.

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The rules that govern how our financial system works should be hashed out in public forums by our elected representatives.”

This begs the question: Why should groups who often have limited business experience have such an outsized influence on the regulatory process?

This is the sort of thing that almost always happens when you hand the job of keeping consumers safe to regulators or nonprofits who have no skin in the game. They are full of aspirations but often lack real-world experience. They are also not accountable to voters.

Fortunately, there's been some good news on the fiduciary front for both advisors and investors over the last couple months. At the end of September, Rep. Ann Wagner, a Republican representing Missouri, introduced legislation that would repeal the Department of Labor's fiduciary rule and would replace it with a common-sense best-interest standard for broker-dealers. It's a good thing when our elected representatives in Congress weigh in on this issue rather than ceding the field to unelected, unaccountable regulators.

Many tax deductions are likely to disappear once Congress passes the tax reform bill into law.
Bloomberg News

This common-sense bill would require advisors to act in the best interest of their clients and to execute a due diligence process that reflects that mandate. Advisors would also be charged with disclosing any conflicts of interest.

In my view, the big-picture rules that govern advisor behavior should be formulated by Congress, while regulators who are appointed should be charged merely with implementing policies that reflect the expressed will of Congress. Regulators should not have free rein to unilaterally impose their will on the marketplace. It diminishes our democracy and harms advisors and investors alike when regulators rule by arbitrary fiat.

The previous crew at the Labor Department really made a mess of things. Their edicts have caused advisors to flee from handling smaller accounts and now threaten to shrink investor choice in retirement accounts. The paperwork and documentation required by their fiduciary standard make smaller accounts toxic for advisors who are protecting themselves by mostly focusing on larger relationships.

A July survey by the Insured Retirement Institute, an industry trade group, reported an upsurge in orphaned accounts since the fiduciary rule was introduced. They claim that 155,000 of their members accounts have been orphaned, with plenty more to come. A study by a mutual-fund industry trade association concurs. The Investment Company Institute reports an uptick in advisors who are rejecting smaller accounts and referring them back to mutual-fund companies.

President Obama's Labor Department empowered class-action attorneys to act as the final arbiters of which investments are appropriate for retirement accounts. In essence, permissible offerings under that standard were defined as those that did not enable class-action attorneys to ring the cash register by winning lawsuits. To counter this menace to their reputation and bottom line, brokerage firms shrunk their retirement account offerings to short lists of investments permitted under the old rule's best interest contract exemption.

Commission business was especially suspect under the old rule. Some firms, such as Commonwealth Financial Network and Merrill Lynch, responded by opting to restrict transactional business in retirement accounts entirely or to narrow the circumstances in which it was permitted.

The rules that govern how our financial system works should be hashed out in public forums by our elected representatives. Their decisions may be far from perfect, but voters at least can weigh in on their actions. This makes the regulations that come from that process more legitimate and far more likely to serve the needs of advisors and the investing public.