Definition: “A fiduciary duty is a legal duty to act solely in another party’s interest.” It may not seem like much, but it’s really a big deal in our business. Registered Investment Advisers, like DWM, have a legal responsibility to put their clients’ best interests first. Wall Street banks and insurance companies don’t. In fact, they “hate the idea” according to John Wasik, in the most recent (8/23/13) Forbes. Mr. Wasik continues: “It would alter their business models and change their bottom lines forever.”
Fiduciaries are not only legally bound to put clients first, they are also required to disclose all investment costs and potential conflicts of interest. Brokers and insurance companies aren’t. To protect investors, the Securities and Exchange Commission and the Department of Labor have been working to mandate fiduciary rules for all financial advisors, including banks, brokers and insurance companies.
Brokers have been putting up a massive effort to avoid the mandate for fiduciary rules. Mr. Wasik feels you have to “look at the profit motive behind the broker-adviser model to understand why Wall Street and insurers are fighting like wolverines to kill fiduciary rules.” It’s all about compensation.
Mr. Wasik quoted Kathleen McBride, a founder of the Committee for the Fiduciary Standard who stated, “Currently, brokerage firms and insurers look at investors as cash cows. They look at using the investors to serve the firm. They are firm-centric, not client-centric. There is a fear at brokerage firms and insurance companies that if they have to put investors’ interests ahead of their own they won’t be able to sell the high commission, high fee securities they routinely do now- that are in the firm’s interests but not the clients.”
Ms. McBride continued, “As fiduciaries, brokerage firms would have to reveal all the costs the investor is paying- what the firm receives and what the broker receives- commissions, fees, revenue sharing, 12b-1 fees, and other trail commissions and more. Clients are not seeing that from brokerage firms now. That kind of transparency brings costs down.”
Finally, Ms. McBride outlined the intense anti-fiduciary lobbying campaign: “There is so much money at stake that banks, insurance companies and brokerage firms are spending hundreds of millions of dollars to derail the fiduciary mandate. The broker-dealer wirehouses, insurers, and lobby groups are pounding regulators and Congress. Congress has responded with a bill and letters to the SEC and DOL calling for a delay or dismissal of the efforts to put investors first.”
Mr. Wasik concludes his article in the following way: “Fiduciary duty may not be the ideal way to cut down on the worst abuses in financial services that produce churning brokers and Bernie Madoffs, but it’s a better approach to align advisers with the best interests of investors than all of the other commission-based business models. It’s clearly a quantum leap forward for investor protection.”
We salute Mr. Wasik and Forbes. Forbes calls itself “The Capitalist Tool.” We’re pleased that they have taken a tough stand to speak out against Wall Street bankers, brokers, and insurers in favor of investor protection and the fiduciary duty. Yes, capitalism can have a “soul.”
At DWM, we, of course, support the client-centric business model and embrace the responsibility of fiduciary duty. We may not make as much money as the brokers, but it’s really not about our money, it’s about yours.