“The fiduciary rule may fade away, but the fiduciary principle is eternal. The arc of investing is long, but it bends toward fiduciary duty.”
– John C. Bogle, New York Times Op-Ed, February 9, 2017
“If you strike me down, I shall become more powerful than you can possibly imagine.”
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
-Obi-Wan Kenobi, The Death Star, 3277 LY
It’s looking more and more like the Department of Labor’s fiduciary rule is on its last legs. President Trump recently signed an executive order directing the incoming Secretary of Labor (whoever that may be) to review the rule with an eye towards rescinding or revising it.
While the scrapping of the fiduciary rule may have a short-term impact on the types of investment advice out there, John Bogle correctly points out that investors have been and will continue to migrate to options that provide a fiduciary level of care.
In fact, the Trump administration’s decision to kill the rule benefits advisors that hold to a fiduciary standard. The debate over the rule has shined a spotlight on the importance of the fiduciary standard and could lead to an exodus of clients away from advisors and brokers that choose not to meet it. It’s only common sense that, when given the choice on the type of advice they get, clients will more often than not choose advice that they know to be in their best interests. Striking the fiduciary rule down could make it, in the words of Obi-Wan Kenobi, “more powerful than you can possibly imagine.”
Clients Demand Fiduciary Duty
Even if Trump does kill the rule, do wealth managers want to risk reputational damage for reverting to pre-fiduciary practices?
Holding advisors to a fiduciary standard is in the best interest of investors. Who wants to get caught arguing against providing that level of service? Accordingly, big wealth management firms like Wells Fargo (WFC), Morgan Stanley (MS) and JP Morgan Chase (JPM) have spent months preparing to comply with the rule. Bank of America Merrill Lynch (BAC) went so far as to eliminate all commission-based options for retirement accounts, transitioning all its clients to fee-only options.
With the industry already moving in the direction of fiduciary duty, one could argue that the DOL fiduciary rule is unnecessary. Assets are already overwhelmingly flowing to low-cost index funds and firms that hold to the fiduciary standard of care.
This rule may have been necessary in the past, but increased transparency and investor education makes it redundant today.
Clients Demand Diligence
While the debate around the fiduciary rule has focused on fees and conflicts of interest, too little has been said about the diligence required. As Michael Kitces pointed out, the rule’s ambiguity over what constitutes a fiduciary level of diligence leaves the door wide open for countless lawsuits.
Such lawsuits would be counterproductive. It’s becoming easier and easier for clients to identify good sources of investment advice and research. Clients are not only going to demand low fees, they are going to demand investment advice based on research that is:
- Complete – all relevant publicly-available (e.g. 10-Ks and 10-Qs) information has been diligently reviewed.
- Objective – there must be quantifiable analysis that supports the recommendation.
- Transparent – advisors need to be able to show how the analysis was performed and the data behind it.
- Relevant – there must be a tangible, quantifiable connection to stock performance.
In the past, it has been almost impossible to provide this level of diligence at a scale and cost that is useful to most investors. We think robo-analyst technology enables a higher level of diligence at such a low cost that ignoring it is unethical.
As a result, we look for a new, different paradigm for research, one that elevates the rigor and diligence behind all advice while keeping costs to a minimum.
Technology is already disrupting the wealth management industry in a profound way. Robo-advisors are projected to grow AUM by 68% compounded annually over the next few years.
We think wealth management firms and advisor should look for technology that puts power back in the hands of advisers by providing insights that robo-advisors and self-directed traders can’t match. Recent developments such as leading robo-advisor Betterment LLC adding human advisors show that clients still want diligent advice that goes beyond, “stick your money in a low cost index fund.”
With or without the fiduciary rule, the future of wealth management will belong to the firms and advisors that leverage technology to provide diligent, affordable, independent advice to a wide array of clients.
This article originally published here on February 27, 2017.
Disclosure: David Trainer and Sam McBride receive no compensation to write about any specific stock, sector, style, or theme.
Article by Sam McBride, New Constructs