Serving in a fiduciary capacity, or at least talking about it, has become mainstream in the wake of the Department of Labor’s fiduciary rule. However, talk is cheap. There is an inherent complexity associated with serving in the best interest of others when hired to do so. Placing another’s interest before your own is a learned behavior and not a result of getting paid to do so.
The plan sponsor perspective on the new DOL rule is only a concept. Plan sponsors have no reality or experience; therefore they possess no perspective. That is easy to accept when retirement plan advisors also have no perspective since they have only discussed the topic at this point. Again, that is easy to understand since very few broker/dealers, RIA compliance units or service providers have a set strategy for their future business model around retirement plans or individual retirement accounts (IRAs) — and even fewer have communicated anything of their future strategy to the outside world. The public statement-du-jour remains, “We are going to wait and see what others are doing, then we will decide.” That is certainly one strategy — shared by plan advisors, advisor organizations and product manufacturers. But at this point there seems to be very little sand remaining in the top of the hourglass.
Where We Are Today
It is much simpler to be deemed a fiduciary as the industry moves from a three-part fiduciary test to a five-part test. The net being cast is much wider when using the new five-part test.
Financial advisors’ businesses and lives are about to be impacted by regulators, employers, affiliations, partners and service providers. (When changing that many components of any industry, the predictability of the outcome is a mystery.)
Is Having More Fiduciaries an Answer?
Looking at other industries may help us understand our own. If plumbers were to be held to a level-comp standard tomorrow — what changes? Can we envision a level-comp plumbing industry? Does a level-comp plumber place the best available pipes in my home — or do they use “index” pipes, because they are inexpensive, and using them consumes the least amount of time and effort? Is index-piping the best-fit solution for every homeowner? If a plumber were to be sued for his work…
Is it appropriate to apply a best interest standard at one’s favorite fast-food restaurant? After ordering the hamburger, everyone is well versed in the follow-up line of questioning: Would you like a large order of fries with that? Would you prefer the Biggee-size cola? That comes with a dessert — do you want the shake or the pie?
When asking the above questions, there may be visual cues why those questions could lead a customer to make poor choices. If operating in a best interest environment, should the clerk be permitted to make up-selling suggestions to a customer, when the suggestions are obviously not good choices for the customer?
Looking at the automobile industry, we see a product- and service-oriented industry that more closely mimics the investment advisor industry. Should car salespeople be held to an unbiased best interest standard? Should “dealer prep” be a permitted charge in a fiduciary environment? It seems to be just an added expense. Since all cars are undercoated at the factory, does the charge for “additional undercoating” seem like a good fiduciary decision, or does it sound more like a charge that may not be in the buyer’s best interest?
From a Sales Environment to Packaged Purchasing
The DOL rule does permit an advisor to say “Hire me” without automatically making that advisor a fiduciary. But that is just about the limit of what an advisor can freely state without concern.
Today’s advisors, who have been trained to identify client needs, encouraged to identify client objectives, educated on how to meet or exceed client expectations and schooled in portfolio construction, are free to engage a prospect with the stimulating phrase, “Hire me.”
We may be entering into a prolonged period where product packaging has a greater impact on the buyer than an advisor’s track record and years of experience.
Staff C. Chalk is the Executive Director of The Retirement Advisor University (TRAU), The Plan Sponsor University (TPSU) and 401kTV. This column first appeared in the latest issue of NAPA Net the Magazine.