When Congress passed the Wall Street Reform and Consumer Protection Act (aka “Dodd-Frank”) in the summer of 2010, it neither reformed Wall Street nor protected consumers. Indeed, it did worse. It institutionalized “too big to fail,” thus, removing all accountability from large Wall Street firms by protecting them, not their customers. It has since become a Rorschach test to determine whether you're more of a politician (you believe the rhetoric of Dodd-Frank) or a mathematician (you can see through that rhetoric and into the underlying reality of just what Dodd-Frank has done).

It appears likely we may soon be saying the same thing about the DOL's new “conflict of interest” (aka fiduciary) rule. It neither removes conflicts of interest, nor does it stay true to the meaning of fiduciary.

First, the idea of eliminating conflict of interest fees is an honorable cause. In short, these fees include the three most conspicuous atrocities of commissions, 12b-1fees, and revenue sharing. While all fees are suitable (and important) for the brokerage industry (where an agency relationship exists), they are undeniably inappropriate for the adviser industry (where a fiduciary relationship exists). To argue otherwise would require you to ignore the centuries of trust law and case law whereby fiduciaries must never engage in self-dealing transactions.

While capital markets run on the liquidity of continual selling (hence the need for commission), the adviser business demands an arms-length regarding all transactions. Peer reviewed research has repeatedly shown conflicts of interest have cost consumers both in terms of out-of-pocket fees as well as lost investment performance. These are not insignificant concerns and the DOL was right to attack the issue.

It was with great disappointment, then, that we learned the DOL is not only not banning commissions, 12b-1 fees, and revenue sharing with regard to rendering advice, but it is institutionalizing them. This is the equivalent of Dodd-Frank failing to punish the large banks responsible for their shady derivatives gambles, but instead rewarding them with immortality.

Caving to industry lobbyists, the DOL will allow brokers to continue to provide investment “advice” while engaging in self-dealing transactions. All the broker needs to do is to disclose this in their standard account opening forms (that nobody reads), make sure the fees are “reasonable” (based on what?), and always act in the “best interests” of the client (wink, wink, say no more). Yes, it's tough to decide if this is more Rube Goldberg or Monty Python.

Making matters worse, the DOL has unilaterally stripped away the one differentiating attribute registered investment advisers (RIAs) previously possessed: the exclusive right to call themselves “fiduciaries.” Now, with an ounce of disclosure, brokers can call themselves fiduciaries while still participating in self-dealing transactions.

Most telling of all, in the DOL supporting materials, the Department consistently refers to brokers as “advisers” (the legal term for RIAs), not “advisors.” What could be more telling of the DOL's lack of understanding of both the investment advice industry and the true nature of “fiduciary”?

Instant Insights /

Is the DOL fiduciary rule another Dodd-Frank?

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