DOL Fiduciary Failure #312-The Low-Fee Fiduciary
I’m sure he didn’t know it, but he borrowed from an idea I posted here a little earlier pointing out how silly the exact, same, barber as fiduciary would be (and even if he did, he did it better, so props to him!).
I don’t agree with all of the examples, but I think it goes to show how ludicrous it is to put a fiduciary duty on everything.
I’m not a lawyer, clearly, but, I know a fiduciary has a number of duties: loyalty, care, confidentiality, prudence, disclosure of conflicts, etc.
It’s interesting though to actually think about what it would mean to commerce if everyone had a fiduciary duty to everyone else.
And, just the simple thought that a fiduciary can be an employee for a product producing firm is an interesting one. So, if you go into the mutual fund producer’s store, do they and their manager’s turn a possible client away because that client is capable of managing their portfolio themselves?
Not a chance.
Given the mutual fund providers often have several different solutions – with sales goals for each! – that they can offer a client… how in the world do we think they can offer care? Disclosure? Are they going to tell a client that they are selling them an annuity today because their sales depend on it?
Is it even possible to remove the conflict?
What about in the ‘online’ advice market? Think any one of these online advisors knows a client as well as I do, only after meeting for many hours will I recommend a portfolio.
Sometimes I tell clients after a few hours that I’m not the right person for them. How does an online robot do that?
Why didn’t we hear about this ‘fiduciary’ thing when attorneys sold online forms directly to clients?
Probably because it was as silly then to think about as it is to think a mutual fund company or an online robot investment firm can be a fiduciary.
What’s a true fiduciary when these things are fiduciaries as well?
Olshan seems to think that a ‘fiduciary’ label will mean that people will save money.
I bet no one thinks of an attorney 'fiduciary' as saving them money. Or, a CEO. Or, company board member. Or, anyone like that. Professionals. They act as fiduciaries, and they are not competing on fees. They are competing on that duty to do their best. Whether it takes one lawyer 10 hours, and another 20, that's not a part of the fiduciary equation for professionals.
Nope, it's a myth that fiduciary is about saving fees. It's only true to academics that think they can make everyone in financial services sell the products they want (see Fiduciary Failure #626 for a failure of an argument that is full of this kind of talk).
Now, that doesn't mean you are ripped off. I pay for bad haircuts A LOT. But, I value other parts of the encounter more than I do trying out a new barber.
I don't think I'm 'ripped off' or deserve money back, though, I think a lot of people like to look for ways to get money back, or in today's world to 'be offended' or 'be wronged.' It simply isn't the case. Not at all to the extent that this rule is fixing a problem, more than it is adding massive expense to people like me that don't want my barber to charge me a fiduciary rate (because those are going up Jeremy, not down).
I’m going to call nonsense on that one though. Just as he points out in his own example, the realtors are fiduciaries, and I’ve never had one tell me to go to the firm next door that is willing to negotiate fees.
No, being a fiduciary isn’t about fees, as Olshan and others seem to focus on. It isn’t about being ‘cheated.’
Here’s why not – popcorn.
You go to the movies and buy popcorn. Many who have not graced my economics classroom will often say, “This popcorn is twice as much as it is in the grocery store! I’m being ripped off!”
And to that and all of the people who think ‘fiduciary’ means ‘lowest cost’ (which is a lot more than you may think btw) I say… nonsense.
The movie theatre specializes in movies. Not popcorn. They are set up with a certain amount of space to draw people in to watch movies.
But, people who go to movies want things. They want popcorn. And snacks. And bathrooms. And arcades.
None of these things a movie theatre specializes in.
So, they use valuable space. Train valuable employees in popcorn popping. And spend money.
And, consumers, who see the service as a ‘win’ for them, pay.
And… they aren’t ripped off.
If you don’t have a gun to your head, and you pay for a service, I’d say it’s the consumer who made that choice.
Now, advocates of the DOL Fiduciary Rule pretend that they can make everyone act in ‘your best interest.’
But, not everyone is qualified. Not everyone has the capacity. Not everyone has the desire.
Yet, sometimes, people want popcorn at a movie, and sometimes they bought an investment in a S&P 500 mutual fund from a trusted auto insurance salesman.
I met someone that did just that. I told her the fiduciary tale. She wanted no part. She trusted the auto insurance guy.
The auto insurance guy’s firm took away the mutual funds. She no longer has a mutual fund guy she trusts. I find that terrible.
The DOL proponents have ignored that every time I mention it. Or, that she only had $50,000. At 1%, that's... that's... $500 / year, before taxes, to the company, and much less to the agent.
Then, these DOL fiduciary proponents want to add hundreds - if not thousands - of dollars of fiduciary busywork for this client per year.
There goes the popcorn. There goes the one investment this person had. In a good enough fund. At a good enough price.
I bet we’d have a lot of sad movie goers, and movie theatre owners if they had to do the same to the popcorn. Which, in this crazy fiduciary world, isn’t so crazy any longer to think about.
It’s also not stopping any of the mutual fund shops or online robot investments firms from pretending they can be a fiduciary.
I win a lot of clients from larger firms by helping them ‘spend’ their money, which, I gather they may be taking advantage of me! Or, I often tell clients to pay more in tax than they planned when it’s in their interest to! All of which costs me in the short-run, but earns me a client that knows I’m a true fiduciary… explain to me how the lowest cost robot or mutual fund firm is going to do that… they don’t know, they won’t tomorrow… let’s keep promoting true fiduciaries where they actually can exist, not pretending we can shove them into a sales world where they never will.
Economic lesson: The consumer chooses the service provider and does their own analysis of the costs and benefits (yes, this is lesson #145), but because they choose, you can’t say they were ripped off.
They are only ripped off by products that legally allow it. Like Equity Indexed Annuities which have confusing disclosures, and, meanwhile the agents tell the same lie that clients will earn 6-10%, and lock that in, and get a fantastic income (often 25-50% of what they can get elsewhere is what I would tell them). But, the DOL was proposing an exemption to these crooks. An analogy would be that every movie pass in the future would have to include a minimum popcorn purchase with a very, very inflated price (even for the movies).
They're really only ripped off though by products they can't get out of. EIAs have 10-15 year surrenders. How about a law eliminating those, and let's call it a day on fiduciary since everyone is free to leave (if we're still ignoring the fact that they can't leave their 401(k) plans, even though Health Savings Accounts HSAs have shown us the financial world can handle accounts for employees at any provider they want.
(And, Jeremy, the guy going to the barber… I would have stuck with the example that a fiduciary would tell him to cut his own hair, but I would have argued that he doesn’t want to do that, he enjoys the atmosphere, the personality of the barber, and so it isn’t in his interest to not pay! Because, I’ve never met a man or woman that doesn’t get the exact haircut they want. Or, just like I robbed a client above, people don’t go back to a barber that doesn’t give them the exact service they want. Maybe you can volunteer though for a ‘fiduciary cut’ and post a pic on what a low maintenance hair style looks like!)