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Investors need to demand an oath from advisors, not a regulation to rule them

Earlier this week, the Department of Labor took the controversial step of delaying implementation of its so-called fiduciary rule from April to at least June. Backers of the rule argue the delay is just the first step in the Trump administration's plans to kill it. In fact, some Wall Street executives who have been close to Trump have stated as much in the past. The sad truth that's lost in this debate is that we're even having this debate in the first place.

Donald Trump
Jim Lo Scalzo | Pool | Reuters
Donald Trump

Most financial professionals have staked out an extreme position on this rule, either venting in hyperbolic terms about the injustice of it or pointing an accusatory finger at Wall Street predators trying to do away with it. I'm in a strange place as an investment advisor: I am sort of happy the rule is under fire, because I have some major bones to pick with it, but I also support it.

Let me explain.

In case you haven't heard about it, the DOL wants to protect retirement savers from poorly conceived investment products and human conflicts of interest. Hey, that's a good thing. You see, the DOL is the body that oversees qualified retirement plans like IRAs and 401(k) plans. It is in the nation's best interest to make sure people have as much savings as possible for retirement and that advisors work in their clients' "best interest," the key and controversial term in the DOL rule.

But the fact that a regulation to do so has to be forced on the industry, and on us independent financial advisors by extension, borders on absurdity. It's not that we mock the regulators behind the rule or even the rule itself. It's just that we chose the independent route over the big-box brokerage firms so we can operate in an environment that revolves around clients — not shareholders, ivory tower management and product sponsors. Don't insult these independent financial advisors with a lecture. We are the ones who are leading the "best interest" charge.

"Even if the rule is delayed, changed or killed, the industry is moving in its direction at light speed, and nothing is going to change that. It's for the better."

I recently sat down with a group of my fellow independent financial advisors in Houston. These men and women are fierce about putting their clients' best interest ahead of their own. The independents, broker-dealers and registered investment advisors were created specifically to operate under the best-interest rule from the beginning of their existence. Their early adoption of fee-based business, technology and good old-fashioned relationships with their clients are the model that the financial services regulators should look to when they want to upgrade the industry to a higher calling. Even if the rule is delayed, changed or killed, the industry is moving in its direction at light speed, and nothing is going to change that. It's for the better.

Changes in the best interest of this rule

Like many other well-intentioned rules, there are also things about this one I'd like to see reworked.

First, the definition of "best interest" is subjective — it's based on matching a client's unique set of circumstances to the most appropriate products and services, but that could be open to interpretation. I'm always weary of a "check all the boxes" investment product, with unnecessary bells and whistles that the product sponsor knows very few people will ever use or need. But there are products that are best suited for some clients, which could truly benefit them.

Second, the rule is open to becoming a marketing campaign that will confuse the public about what constitutes best interest — an industry "one-upsmanship" game of thrones. Third, not everyone belongs in a fee-based account. For instance, an annual fee would make ownership more expensive than a one-time commission for an investor who does not change or sell a product for many years. Time horizon is very important, but that's a topic for another post. Of course, there could be an investment held in a fee-based account for a long time, but an expectation of monitoring and looking out for a need to sell it should be part of the advisor-client relationship.

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Finally, I understand that IRA and 401(k)s are the kinds of accounts in which savers have the bulk of their investment assets and the ones that DOL oversees. But why not extend the best-interest rule to all accounts, not just retirement accounts? I've seen some of the products that the DOL wants to protect us from, and I can say wholeheartedly that some of these products are unadulterated crap. So I don't want to come off like there aren't bad actors in my industry. There are, and we all know it.

I believe the new rule is better than leaving things the way they are. In fact, the rule should've been introduced a long time ago. But I also think there's a simpler way to keep advisors on the right side of their clients. All newly minted advisors should be required to take an oath to put their clients' best interests first. The rest should be required to renew the oath annually. The DOL rule may live or die, but clients should be looking for an advisor who agrees to live by this oath without bringing the political powers from all sides into it. There are plenty of interest groups, but only one definition of "best interest" that matters — the one an advisor and a client agree on together.

By Mitch Goldberg, president of investment advisory firm ClientFirst Strategy