The first two months of the year saw the release of a pair ofindependent studies—the first from the National Bureau of EconomicResearch and the second from Boston College's Center for RetirementResearch that might have flipped the debate on the cost of auniform fiduciary standard.

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Indeed, the issue of the fiduciary standard never should havecentered on fees. Fiduciaries can charge any range of fees, as longas they're “fair.” The real issue should have been, and always willbe, conflicts of interest. Remember, the singular motto of thefiduciary duty isn't “charge the lowest fee,” it's “always act inthe best interest of the client.”

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It's always in the best interest of an investor to invest insecurities that have the best chance to maximize returns. The NBERpaper (“It Pays to Set the Menu: Mutual Fund Investment Options in401(k) Plans”) concludes brokers are more likely to keep andrecommend affiliated funds even if they appear in the worst decileof investment performance. The study found these poorer-performingaffiliated funds went on to underperform by an average of 3.6percent. This equates to a cost of more than $1 billion a month—orabout $30 billion in total since the SEC first proposed the uniformfiduciary standard.

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Before the dust even settled on the NBER study, another studycame out in February. The CRR research focused exclusively on IRAs.It echoed the conclusions of earlier studies that show broker-soldfunds—regardless of their performance decile—underperformdirect-buy funds from as low as 23 basis points to as high as 2.55percent. The CRR paper looked at 2009 data and concluded (notconsidering performance at all) 12b-1 fees alone cost IRA investors$2 billion.

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The common thread in both these studies is the ongoing conflictof interest to which investors are being exposed. By usingaffiliated mutual funds, brokers are not acting in the client'sbest interest. This is the focal point of the fiduciary standard.Eliminate the conflicts of interest in terms of giving advice, andinvestors will immediately benefit. It doesn't mean eliminatingbrokers, it just means eliminating the claim that brokers aregiving advice. They are not. Advice requires a fiduciary duty.Brokers don't (and shouldn't) have to operate under the regimen ofa fiduciary duty.  Brokers don't give advice. Theytrade.

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By eliminating the opportunity for brokers to give advice, theSEC will eliminate the conflict of interest. From then on, it'scaveat emptor for investors. They'll have to understand thatdealing with a broker involves greater due diligence than whenhiring an investment advisor. It is the very assumption of thisfiduciary duty that sets the investor's mind at ease and justifiesthe fees charged by the advisor.

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