A Broker’s Take on the Fiduciary Rule

A 30-year veteran stockbroker weighs in on the battle in Washington over the Department of Labor’s proposed fiduciary rule.


For all the stockbrokers and insurance salespeople who have been protesting the U.S. Department of Labor’s fiduciary rule and pouring hundreds of thousands of dollars into lobbying against it, there are some folks out there who have not only accepted it, but they are also embracing the change.

A big topic this year has been the advent of a conflict-of-interest rule intended to equalize the standard of client care among financial advisers of all stripes who dispense investment advice to a retirement plan, plan participant or individual retirement account owner. Since April, when the rule was introduced for public comment, I’ve spilled quite a bit of now-proverbial ink examining the arguments for and against the rule and vetting its chances of being enacted with anything close to the spirit in which it was designed.

As the waiting period winds down for the final version of the rule that is due out in early 2016 — following four days of hearings in August at the DoL and more than 3,000 public comments — I wanted to learn an insider’s view of the fiduciary rule debate. Not from a formal spokesperson, industry expert or talking head, but from a longtime friend who has spent three decades as a very successful salesperson for some of the largest brokerage houses in the country. A decade or so into her career, and to my surprise at the time, she, like most of her colleagues, dropped the stockbroker moniker and acquired the title “financial adviser.”

It turns out that my stockbroker friend, whom I’ll call “Anne” to protect her identity, has long anticipated the inevitability of a rule requiring her to act as a fiduciary when dispensing financial advice. For one thing, her employer has been issuing warnings for years. Anne believes in the concept of evolution and doesn’t believe her industry is exempt. “Firms are delusional; they think they’re aboveboard,” she confides. “That’s what has forced them to resist.”

“They’d like to keep their higher fees, but they will come down,” she adds. As an example, Anne explains, her firm offers an S&P 500 index fund at four times the fee that it’s sold for by the Vanguard Group. In light of the new need to put clients’ interests first, the firms that “reduce their fees will get the most new business,” she says. “This is a new idea. It’s revolutionary.”

Anne points to industry practices that will have to end. One is that brokers don’t have control over the products they sell. “When I buy a stock, I have control,” she explains, because it’s not a product that the firm put together. She points to “buy lists” that her firm and its competitors give their salespeople, restricting products that can be sold. “If I could look at any mutual fund or any ETF, I’d be thrilled,” she says. Product wholesalers regularly bring doughnuts to the team to sweeten their pitch, much as pharmaceutical salespeople do when visiting doctors’ offices.

My broker friend is not alone in believing the industry is moving in the right direction. Last week, a few days after Anne and I spoke, I attended a press briefing by industry organization Money Management Institute ahead of its two-day 2015 Fall Solutions Conference at the Grand Hyatt in New York. There, MMI president and CEO Craig Pfeiffer and Jack Sharry, principal and head of strategic development at LifeYield, a software developer for financial advisers and investors based in Boston, put forth the idea that the financial services industry must move away from sales- and product-centric practices to goals-based wealth management.

Sharry pointed to a 2013 Morningstar report titled “Alpha, Beta, and Now ... Gamma” in which the writers estimate clients can earn between 100 and 200 basis points a year in additional performance with “more intelligent financial planning decisions.” A move to what they term a “holistic” view of a client — taking into account entire life circumstances, family, retirement goals and household asset allocation — will be “expensive and complicated” for firms to invest in. But the future of the human financial adviser, as opposed to a robo-adviser, depends on expanding the role from portfolio asset allocation to helping clients with their goals, concluded MMI presenter Sean Fullerton, senior research analyst at State Street Corp. in Boston.

Over her years of experience, Anne has developed a similar view of client wealth management. But the doughnut-fed brokers, aside from having a limited playbook, also believe they are doing a good job. That includes a Stanford University graduate in Anne’s office who loaded up all his clients on tax-deferred annuities for fees of 4 to 5 percent, because he thought the market was crashing. He has since left the firm. “In this office, if you looked at everyone individually, there’s no one congruent way of investing,” explains Anne. “This person loves mutual funds; this guy likes insurance.”

One thing everyone can agree on is that change can’t happen overnight. That’s because there’s so much money in mutual funds because of years of explosive growth in 401(k) plans, says my friend. The reluctance of the financial services industry to change was on full display on October 27 when the U. S. House of Representatives, succumbing to a heavy lobbying effort, passed a bill to try to stop it.

“You won’t have it quickly, but it’s under way, and it’s coming,” says State Street’s Fullerton, adding that technology will facilitate change.

“It always changes,” says Anne, recalling the 8 percent fees on mutual funds when she was a new broker in the early 1980s. “If people could look at this as a natural evolution of the industry, people would be less resistant to it,” she concludes. “When you make things adversarial, it doesn’t work to the clients’ benefit.”

Follow Frances Denmark on Twitter at @francesdenmark.

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