This is a third follow-up to an article I questioned author Bob Clark’s claim that regulation on advisors is not a “political issue” and provided a lengthy response on all of the political positions and statements that I saw in his writing.
There were a few select ideas that Mr. Clark addressed from my response which I posted recently at the blog. This blog is on the point that regulation is necessary to be the same on personal chefs and grocery stores or people will be harmed.
Mr. Clark makes the point that my attacking this regulation is somehow necessary to increase standards.
I’ve made the point in my last blog that personal chefs are not doctors and that increases in regulation only remove these jobs from the economy. You can have regulation that requires advisors to do all sorts of ridiculous actions (as the Fiduciary Rule does), but it only increases costs and has consumers move to other options.
The other option that Mr. Clark is offended by appears to be the brokerage and insurance industry. He claims because they have a lower standard, that clients are harmed.
Are people who eat fast food rather than hire a personal chef harmed? Are people who can not afford a personal chef who has a wealth of knowledge of organic farms and handpicks ingredients harmed by having another option?
Mr. Clark begins this point by calling my comment about believing in free markets “thin.”
Yet, let’s look at the brokerage business and how it has served clients and see whose arguments are actually thin.
Not everyone needs a personal chef. Not everyone who needs a personal chef chooses to hire one.
The Fiduciary Rule requires advisors not take on clients who do not require their services.
If I’m a personal ‘chef’ and I only offer that service, I can not take on clients who do not need it!
If I am an advisor who is fee-only and charges a low-fee, it does not matter how low it is if a client only needs a one-time service.
And, who is it that serves clients that need one-time services?
Brokers, banks, and insurance agents! The scoundrals that all of the Fiduciary Rule supports love to suggest are conflicted because they work under a different scheme.
They are a grocery store, not a personal chef! "How dare they be a grocery store!"
They can charge far less than I can on an hourly basis for the vast majority of clients.
Yet, Mr. Clark is offended, apparently, by a firm that charges a little more than an index fund in order to be on call for that client in the future, responsible for reviewing and updating accounts, responsible for past recommendations, etc.
What Mr. Clark fails to understand is that clients choose. And, they weigh costs and benefits. I’ve made this argument in the past and so won’t again.
It is true that not all understand those fees, but in my experience working within these firms and competing against them, those clients are a minority.
As were people who did not receive health services before the ACA.
Today, many do not receive health services because they pay a lot more for it!
Just as fewer will receive personal advice services!
The market argument may look shallow to people who do not understand the actual depth of how it works. It’s a higher fee after all!
Yet, it’s much lower than an ongoing fee. It’s much lower than an hourly advisor. And, despite what the government says, it is ‘advice’ on some level, if advice on a product.
Mr. Clark's statement that the market argument is 'thin' yet his own argument ignores the way prices of goods and services are chosen by the client, which means they are set by the buyer (the client), is rather ironic. His own view that prices are just high - in his view - I'm not sure could be more simplistic. Prices are not just high, prices are as low as the market and current government regulation allow because the market seeks to serve the most clients.
That seems extremely thin, and not something that I think many who understand markets and prices would say about any other price of any other good. It is an obsession some have that a brokerage regulated by many institutions, that frequently gets charged fees and fines, and that has to pay much more in attorney and other fees than a Registered Investment Advisor, and yet still provides a lower-cost service to the vast majority of consumers... I think shows a political agenda at play.
And, as a fee-only advisor, I will share, 0.75% on an A-share mutual fund that a client has held for 10-20 years, is not high as Mr. Clark's point that brokerage costs are just high suggests. I struggle - more so with the Fiduciary Rule - with telling clients they should sell and move to my 1.2% service (0.85% plus fund costs), even though the client chooses it. If a client asks if they should move these funds, I give pros and cons. Mr. Clark sees no cons in his false view of the world.
I don't really struggle though because the client chooses the service and cost that best fits their needs! And, many choose the brokerages!
Yet, the Fiduciary Rule states that I need to not price my services outside of the 'market.'
Now, grocery stores and personal chefs need to compare themselves, whereas in the past, we know what a brokerage was, and what a personal holistic fee-only advisor was. Soon, they will both be the same as far as the government is concerned, yet, if I do more and my clients expect more from me... shouldn't I charge more?
The impact will be personal chefs will lose in the end. Fiduciary Rule supporters fail to see this. They believe they are bankrupting brokerage firms (grocery stores) and will be flooded with their clients.
Just like a grocery store clerk can give advice on the products on their shelves. And, the client who chooses the grocery store benefits.
Proponents fail to understand that the client chose the grocery store, and the grocery store is much bigger, and isn't going away. They will only get bigger, and push our smaller stores and personal chefs. Some of the parts of the Fiduciary Rule that are the most insidious are the ones that put personal chefs in comparison to grocery stores and put the personal chefs at risk if they take clients from grocery stores.
Mr. Clark thinks everyone needs a personal chef, and will hire them. Especially as costs rise.
It is a shame so many think it is just a ‘simple’ solution to strip personal advice from consumers and will provide the ‘simple’ reaction from clients that they will just all hire personal chefs.
They won’t. It is simple. Just not as thin or simple as Mr. Clark would believe. We have a history of this sort of industry takeover in the USA and the results are 100% the same.
The big and connected win because they wrote the law. The law is meant to put personal chefs out of business and to also have great slogans so that personal chefs cheer their demise on.
Just like Dodd-Frank eliminated the safer, better community banks, the Fiduciary Rule is eliminating the option of safer, better personal financial advisors. They - and people that do not study markets and regulation - just won't admit it until they have to.
PS – While Adam Smith was a great writer, and brought together a lot of great ideas, he really wasn’t a pure capitalist in any way (video link). Neither are Fiduciary Rule supporters. I think they and Adam Smith may have a lot in common that they like the slogans about the market, but don’t believe in it at all! Smith also had some very flawed thinking about how prices work in a market economy. Though, Mr. Clark will appreciate that Smith had many anti-businessman suspicions and also thought price controls worked. They only remove grocery stores in the end though.
PPS - There is another point I may address that Mr. Clark states that I am for Merrill Lynch 'profiting' much more than they would if they were an RIA.
I may write on this, but, in a nutshell, profits are a sign of value provided to clients. I don't actually know their profit since he lists their revenue, but if their profit is higher than most firms, I would be surprised. If I find time I'll also explain how the Fiduciary Rule will lower profits (and capital value) of RIA firms, reduce investment, innovation, etc., and lead to the large firms profiting MORE as firms go out of business (as they are today, as they have in every other firm throughout time).
An analogy, Mr. Clark might have been for Dodd-Frank because 'those big banks profit so much and put our system at risk.'
Years later those big banks are bigger, profit more, and will continue to since they put all of the innovative community banks out of business.
As Fiduciary is doing to innovative investment firms.