In 2010, the Dodd-Frank financial reforms gave the US SEC (Securities and Exchange Commission) the authority to propose a rule that would require those selling financial products and advice to act as fiduciaries (ie., give advice best for the client ahead of their own compensation interests, not make secret profits, not hide conflicts of interest) — but it did not require that the agency write any rules.
Since the S.E.C. is actually an agency funded by the financial sector itself, perhaps it is not surprising that four years later, the S.E.C. still has not said whether it will even propose a rule. Daniel M. Gallagher, a Republican commissioner at the S.E.C., revealed the systemic bias against needed reforms in this area, when he said in March that he was not sure a majority of the commission believed a stronger rule was necessary. (That’s nice Daniel, but following the 2008 financial crisis, the government of the people–the US legislature–already decided this question and said that a stronger protection for clients was necessary.)
Meanwhile the US Labour Department has proposed an amendment under ERISA (the Employee Retirement Income Security Act) to expand the conditions for when investment “advisers” become fiduciaries. To try and hinder financial sales firms from raping and pillaging vulnerable and trusting employees who are directed by their employers to financial representatives for planning help, the agency has proposed a fiduciary standard for those advising clients about registered retirement accounts. Even without seeing any specific wording the financial industry has thrown all of their financial weight and lobby power to arrest all efforts in this direction. The Labour Department has repeatedly delayed enacting the proposal.
The net effect is that 4 years after Dodd Frank outlined the need for a broader fiduciary standard in financial consulting, change has gone no where, even as the stories of financial pain and suffering and lasting economic damage to individuals, families and our economy are LEGENDARY, indefensible and epidemic. See more here: Brokers fight rule to favor best interests of their clients.
This discussion is critical and progress toward higher standards must happen. We simply cannot afford the status quo which has played a key role in degrading the financial health of the masses the past 20 years.
But all this very basic discussion misses a larger elephant in the room which is routinely overlooked today: even fee-based accounts and advisors who acknowledge and advertise themselves as fiduciaries typically charge a higher fee rate on client capital that is allocated to equities and equity based products than they do for cash or fixed income holdings.
When equities are today at secular high valuations only surpassed once in human history (in 2000) and therefore likely to mean revert by as much as -50%+ before they can present fundamentally attractive investment(as opposed to speculative) opportunities, then how can a fiduciary justify holding client capital in the risk fire at these levels in order to collect higher fees for themselves?
The client lawsuits against asset managers and advisors coming out of the next bear market loss cycle will do well to focus on this aspect of failed fiduciary duty: the duty to put the clients’ best interests for capital protection ahead of the advisers interest in collecting higher fees. This is the ‘advising’ industry’s, Achilles’ heel.
