DOL Fiduciary Rule Failure #002-Is NAPFA Suicidal?
I have no problems with associations supporting rules that are in the interest of their stakeholders. However, most organizations have a duty to promote a membership or cause, and NAPFA is unique in the financial services world in its promotion of comprehensive, fee-only financial advice.
When it comes to the DOL’s Fiduciary Rule, as a long standing member of NAPFA, I fail to see the benefits to myself as a member, to my clients, to prospective clients that may or may not work with me once the rule is in place.
Due to the current and potential future requirements of the rule, firms like Dalbar have estimated a $500-1,000 additional cost per year per client for fiduciary advisors. My estimate is in that range, though possibly higher for small firms like myself that would spend more for fixed costs, and that it will continue to increase. Much of the cost provides no benefit to clients, will not change my recommendations, and will create a larger gap between my ability to provide ‘true fiduciary’ services to clients.
The rule has nothing to do with the promotion of comprehensive advice. It won't provide comprehensive advice.
It also has nothing to do with making all 'fiduciaries' in any real way, as I've written about before.
In fact, it confuses comprehensive, fiduciaries at NAPFA with firms that provide far less of a service, and a much less independent one as well.
So, why would NAPFA be in favor of a rule that obviously will do harm to current members, and not promote true fiduciary advice?
I have no idea, other than to recall what Milton Friedman referred to as the suicidal instinct of business.
Here is Friedman being far more charismatic and intelligent than I’ll ever be discussing about the need for associations to hold business to the same rules, and to not value influence over government.
The line of thinking goes like this - business goes along with government for the chance to benefit, usually by forcing others into the same line of business via regulation, or reducing current competition by imposing unreal costs and removing smaller firms ability to compete or provide services to expanded segments of the market. By giving away the very principles they stand for, they may benefit for a time, however, they end up devaluing themselves in the face of consumers and government.
NAPFA’s support may come with both of the above ‘benefits’ – by making it less attractive to not be an RIA, I am sure NAPFA believes they will benefit in membership. I personally don’t believe that, since most RIAs would maintain insurance licenses, but, even if they did not, the value of membership certainly would decrease to current and future members. Many 'new' RIAs will be market leaders, and not willing to bend on principle, as NAPFA has.
Benefits will also decline for current members. I have noticed a 25% lower rate in website hits that come to me from NAPFA over the last year. That number can only go so low before the trade-off on my own principles makes it not worth the cost.
Next, I’ve already changed my offerings, as have most firms in the industry. Most have been raising fees, minimums, and removing options for lower-cost commission relationships. NAPFA is not doing any favors by signing off on press releases that pretend that legislation which imposes costs on firms is lowering costs. What is happening is the idea of a ‘fiduciary’ – the one thing that NAPFA promoted, which I’ll refer to as being a ‘true fiduciary’ – has been devalued. When mutual fund firms that sell their own products and online robo firms call themselves a fiduciary simply because they charge a fee, it removes any value in the term (and, I submit, it is not accurate in the historical use of the term, and actually somewhat silly to think of these firms as being ‘fiduciaries’ as I wrote about in #312. Fiduciary is not about ‘low fees’ as it has been twisted by illogical intellectuals promoting this rule).
Freidman, of the University of Chicago, home of great figures in personal finance and organizations that stood on principle like Friedrich Hayek, and a lot of the folks behind Dimensional Fund Advisors (DFA). UofC by the way, doesn’t put up with the current ‘social justice’ thinking which is responsible for shutting down free speech, threatening violence and otherwise against people who may disagree, and who simply do not want to be ‘offended’ with different opinions.
Unfortunately, many influencers in the financial services field today have grown up in or teach in university and political thought atmospheres that are not as tied to principle as UofC.
NAPFA’s position on the fiduciary standard falls apart in my opinion when I requested information on if they will be submitting an opinion on the DOL’s open comment period for an exemption to the fiduciary rule for Equity Indexed Annuity (EIA) providers.
What NAPFA should be for is an even playing field. By not commenting, it is clear this is a political, rather than principled response. Which, unfortunately, NAPFA has had its issues with over recent history.
For my ten years as a member, I don’t recall one issue NAPFA has led on that would positively impact fee-only fiduciaries. I’ll name just a few here:
State-based 401(k) plans
Minimizing of ESAs
Tax law changes – especially in the areas of confusion for financial advice
The monopoly system of employer-sponsored plans, which, if ended, would make the fiduciary rule nearly irrelevant, and would benefit NAPFA members, and the public at large, more than this rule.
If NAPFA for fiduciary as a good thing for non-stakeholders, are they acting as a fiduciary to stakeholders?
Meanwhile, most of the world that is interested in reaching consumers – as one would think NAPFA would be interested in – knows that Google rankings are based on a website’s friendliness, and being friendly to mobile readers is most important.
Google fails NAPFA’s site in all categories, as can be seen here. Failure may mean lower search scores for the public. It certainly means those on mobile devices are more likely to skip NAPFA’s referral functions.
NAPFA over the last many years has spent more time, money, and energy on political causes of the moment, which, I’m guessing at least 50% of their members disagree with. Their support of the DOL Fiduciary Rule is as much political in nature, hidden behind a support for a ‘fiduciary’ standard, which does not and will not live up to the one imposed on its members. Many are suggesting more that members need to do to comply with the standard, which robo and conflicted fund outfits will not be doing.
For this article I did send NAPFA the below questions to include their response, but as of today they have not responded to my questions, though I did receive a response. I was offered time to speak on Friday, 2/3, which was canceled, and I was offered a chance to listen in on a public policy call on 2/14. (And, yes, I am aware of the grammar issue! I do get sloppy with grammar when writing a passionate email!):
Will NAPFA comment on the DOL exemption [for EIAs during the comment period]? If so, why has there not been communication to members as there was with the DOL rule? If so, will the comments be shared with membership ahead of time?
If NAPFA is not responding, what would be the reason that NAPFA would not respond to a proposal for an exemption for equity indexed annuity salespersons to the DOL fiduciary rule?
How does the proposed exemption benefit NAPFA members or its mission?
Has NAPFA set aside growth via outreach, to growth via government? In other words, does NAPFA expect a large number of membership increases due to the DOL Fiduciary Rule? If so, is it aware of changes to its membership that will result? I am going to suggest that the comments on boards as to what a fiduciary is that NAPFA and the government seem to be promoting will harm small, fee-only fiduciary firms, though, perhaps that is not a concern if there will be many new RIA firms?
If the above growth plan is accurate, what will the value of NAPFA be to the large firms? It seems referrals are only so large of a pool, and if NAPFA is not leading by opposing an EIA exemption that is harmful to members, what will the benefits be?
Can you refer me to 1 NAPFA member who has ever recommended an EIA to a client?
If there is one thing I’ll stand up for the EIA industry, it is that they and their associations promote the needs of their members. Just as NAPFA should be promoting – not seeking to regulate – the needs of its members.
Yet, a recent NAPFA magazine included a request for more funds from members, to fund more pushes for regulation. I’ve yet to see a victory for NAPFA in promoting holistic services, that promote its interests and membership. If there was one area that we could find that did not compromise core values, I would think it would be to oppose an exemption for EIA salespersons, however, the lack of a response just shows that the association may have compromised.
I also see benefits accruing to members who are not 100% in the financial advisory world, and who certainly do not serve the same types of clients that I do, to the extent they still serve new clients. My non-lawerly understanding of a 'true fiduciary' is that they have a duty to not allow some to benefit at the harm of others they also represent.
Isn’t it odd that a group pushing a fiduciary standard, all be it a lower standard than its members live up to, may be providing a lower standard to its own members?
What does NAPFA have in a world where everyone is a 'fiduciary' but true fiduciaries do not want to be in the same pool? I don't want to be a part of an association that degrades its membership to the point of being seen by the public as being the same. In the past I have paid to be a part of a service that introduced me to potential clients. Those clients that I connected with said that they were harassed with several phone calls a day to come in for an initial appointment. They initially lumped me in with these other firms, where I have always acted more professionally (like a 'true fiduciary'!) in my calls to prospects. One call, one email, I have many more who will understand the benefits of a fiduciary today.
That's all about to change.
How could NAPFA promote fiduciary advice?
Here is another video by Uncle Milton that I hope may just inspire others to ask NAPFA why their CEO thinks that more government, and more regulation of true fiduciaries, is a good thing. Especially when they won’t opposed competitors getting free passes.
I’ve listed plenty of ideas in the past. One being that 401(k) plans should not be monopolies as they are today, they should follow the model of Health Savings Accounts which allow investors to invest at any institution that they like. This would instantly lower costs of true fiduciaries and we would see far more true fiduciaries in the market.
Instead, we see conflicted online services, we see conflicted EIAs, and we see conflicted brokers charging different AUM schedules depending on which funds they choose for clients. None of these services is that of a true fiduciary, since I doubt any have ever turned down or fired a client, as true fiduciaries must if they can not help. Until NAPFA has the guts to stand up for a true fiduciary service, and to speak out against the EIA exemption, they have shown the willingness to suicide their value to member firms (and, the business value of the ones that will be around in the future!).
Virtue signaling to say that regulation is simply right "just because" as I have heard from some intellectuals at NAPFA, promoting social justice causes, and engaging in outright harmful ‘thought leadership’ to members isn’t going to promote the acceptance of a true fiduciary standard. It is simply leading to the profiteering of firms that can now claim what NAPFA always held for its own – that members stand for a true fiduciary level of care that will never be (because it can never be) replaced by robo-advice and product providers.
If NAPFA is more concerned with the objectives of others, it will have the same impact as if the University of Chicago began bending to these unprincipled universities that cater to the insecurities of others rather than standing on their own strengths. The University of Missouri is just one example of university systems that have seen massive drops in alumni donations, enrollment, etc.
But, they’re willing to sacrifice all members so that a few large product firms can start to charge an asset-based fee for advice they used to give away for free or for a negligible commission. If NAPFA believed in fiduciary, they would question why all of these firms today which are beginning to compete in their world, at a much lower standard of care, can be fiduciaries.
(Extra credit video for those that love freedom and serving their clients’ best interests… this one would really burn the intellectuals, but I think it could be even over their heads).