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The Most Horrendous Lie on Wall Street is Getting Exposed

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“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” ― Upton Sinclair

 

Earlier this month writing in Fortune Magazine, Josh Brown, the CEO of Ritholtz Wealth Management, called opposition to a pending Department of Labor (DOL) rule “The Most Horrendous Lie on Wall Street.” It turns out, this lie is already getting exposed.

The pending DOL rule, as the Wall Street Journal describes, would “require brokers to put the interests of retirement savers ahead of their own.” It would hold all investment professionals who provide advice on retirement accounts to the fiduciary standard.

This sounds like a no-brainer right? Wait, aren’t all advisors required to put their client’s interests first?

At Cordant, we are unwavering fiduciaries for our clients; meaning we make financial decisions based on what is best for them. We’re compensated by our clients only for the advice we give—not for selling any fund or by generating commissions. But even after explaining this to a lot of prospective clients they don’t immediately get that the entire industry doesn’t operate in this way.

Fiduciary vs. Suitability

Financial Advisor or Stock Broker? Many people outside the investment industry use these titles interchangeably. Broker or Advisor—either way, it's "my investment guy (or gal), right?"

Fiduciary Standard or Suitability Standard? Again, many outside the industry would view these as the same.

But, there's actually a big difference between the two, and it's a big reason the major Wall Street brokerage firms are fighting tooth and nail to stop the new DOL rule.

The fiduciary standard essentially says that an advisor must act in their client's best interest.

The suitability standard, on the other hand, says that investment advice must only be reasonable for a given client’s situation.

For example, when selecting a mutual fund the fiduciary advisor has an obligation to select the share class with the lowest expenses. On the other hand, a broker, held to the suitability standard, could choose a higher fee share class, one with an upfront load, (i.e., fee) in order to increase their commissions. This fund may be suitable for the investor just not best.

Brown, who I had the pleasure of having lunch with last week, is especially suited to expose this lie. As he tells it, “For the first half of my career, I was a cog in the machine, working at third-tier broker-dealers and selling products to the masses. I saw these conflicts firsthand.” He continues in his  article for Fortune:

“Under the current compensation regime, even the best intentioned brokers are continually put in a situation where what’s best for their own paycheck is not always what’s in their clients’ best interest. Brokers are routinely compensated the most heavily for selling the products that cost their clients the most in fees and lost performance.”

The Lie is Being Exposed

Brown calls attempts to stop this new rule “The Most Horrendous Lie on Wall Street." And the lie goes something like this—the new legislation will reduce access for the middle class to investment advice and simultaneously raise the cost of that advice.

The problem is, this lie is already being exposed as false.

On March 16th the Wall Street Journal outlined how some of these brokerage firms are already, before the DOL rule is even officially in place, making changes to their business model. According to the WSJ:

“LPL Financial Holdings Inc., based in Boston, said Wednesday that it would lower its minimum for certain fee-based accounts by $5,000, to $10,000, this year, while also cutting some of the costs associated with those accounts.”

And LPL isn’t the only firm making changes.

“Edward Jones plans to roll out new low-cost accounts that charge an annual fee to investors with as little as $5,000, according to Jim Weddle, the firm’s top executive. D.A. Davidson & Co. of Great Falls, Mont., is in the process of developing a similar product, according to an executive." 

But, this wasn’t what they said previously:

“Several brokerage executives and research firms have predicted a narrowing of options for small investors, but these new fee-based products may run counter to that thinking.”

And so, the “Most Horrendous Lie on Wall Street” is being exposed. What's more, this evolution toward the fiduciary standard is being rolled out across the world. In the United Kingdom and Australia, this standard is already in place. And similar changes are under way in Canada as well.

We welcome this expansion of the fiduciary standard. We are proud that we are already held to it and think it's the best way for a client to receive objective financial advice. Clients are best served when both they and their advisor are sitting on the same side of the table.

As Brown concluded in his Fortune article, “Regardless of what plays out, the industry will eventually be forced to abandon the horrendous lie that conflict is a requirement for service. Technological innovation and the relentless force of American capitalism will find a way to improve the state of financial advice profitably, just as it always does.”

 

 

Interested in learning more about how Cordant can help you achieve your financial goals, watch our online webinar "Optimizing your Retirement - Debunking Common Misconceptions about Retirement Planning." 

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Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.

Published on March 21, 2016

Isaac Presley, CFA

Isaac Presley, CFA

Isaac Presley is Director of Investments for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Isaac's full bio.

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