Many years ago, while researching the history of trust law for a book I was writing, I noticed a perplexing coincidence.
It seemed, when it came to allowable trust investments, various state governments, as well as the federal government, lagged considerably behind the capital markets.
In some cases, for example, trust investments were limited to stable value or income producing investments. While this certainly sounds “safe” and “prudent,” it turned out to be a disaster if the trust needed to grow.
It took a long time until the last regulatory restriction on trusts investing in equities was lifted, but, if I remember correctly, the bulk of them were removed just in time for those newly invested trusts to suffer from one of the worst market declines in history.
So you can imagine what I was thinking when fi360’s Blaine Aikin responded to one of my interview questions with the comment “The reality is that regulation is a lagging indicator of marketplace developments” (see “Exclusive Interview with fi360’s Blaine Aikin: DOL’s Fiduciary Rule ‘Takes Advisors to a Fork in the Road’,” FiduciaryNews.com, October 18, 2016).
Aikin mentioned this within the context of the DOL’s new conflict-of-interest (aka “fiduciary”) rule. We were talking about whether, even if the rule is rescinded by the Trump administration (a campaign spokesman finally declared Trump, as President, would reverse this rule), “the cat had already been let out of the bag.”
Aikin said there was no turning back. With or with the regulations, the marketplace is now demanding “fiduciary.” The momentum is unstoppable.
We’re seeing increasing anecdotal evidence that the term “fiduciary” has finally entered the mainstream lexicon. Sure, everyone is aware of John Oliver’s 21-minute take on “fiduciary” during his HBO show last spring, but we all thought only insiders noticed.
Last week we discovered the very real fallout from Oliver’s comedy routine: millennials are asking in droves what “fiduciary” means. The last time we looked, John Oliver is not a government regulator. Heck, he’s not even American.
Then there’s a slew of ads from the Money Store – er, “Financial Engines” – purporting their value add is that they are fiduciaries. (That’s a good thing,… we think.) Now we have Merrill Lynch canning commissions on IRA plans. This is the momentum Aikin refers to. “Fiduciary” is now embedded in the marketplace. We don’t need a formal fiduciary rule to perpetuate “fiduciary.” Once the industry acknowledges its primacy, it cannot be taken back. Indeed, the demand for “fiduciary” is now irreversible.
We’ll leave it for others to decide the degree to which the regulatory discussion – and eventual rule – prompted this movement, but it is clear that, even before the official rule becomes effective, the reality of “fiduciary” has arrived.
But before those who advocate for fiduciary pop open the champagne, remember this, to paraphrase an infamous moment, “it depends on what the meaning of word ‘fiduciary’ is.”
If “fiduciary” means no conflicts-of-interest, that’s one thing. If it means merely disclosing conflicts-of-interest, then that’s quite another thing.
There are some who interpret the DOL’s rule as opening up the possibility of the latter. Without these DOL-sanctioned allowances, the definition will be left up to the market. Oddly, while many are concerned about the market leading to a “race to the bottom” when it comes to fees, permitting market forces to frame what “best interest” means will most assuredly “define fiduciary up.”
In other words, we’re more likely to get a purer definition of fiduciary when competitive forces do it rather than the government.
If it’s not obvious by now, the government serves a different master than the people do. It possesses its own unique set of conflicts-of-interest, too complex and too intertwined for mere mortals like us to understand. All kidding aside, this is honestly the true circumstances faced by the SEC, which goes a long way towards explaining their recalcitrance on the matter of defining a universal fiduciary standard.
Just like market forces (literally) refashioned the basic tenets of trust investments nearly a century ago, today we find ourselves in a market environment that will transform “fiduciary” faster and more efficiently than any regulators can.
Who knows, by the time the market has done its work, maybe the regulators will have fully decided what needs to be done.