The CEO of my brokerage firm asked for my support in opposing the Trump administration’s plan to roll back the Dodd Frank Act and the Fiduciary Rule for retirement accounts, which would require brokers for retirement accounts to act in their client’s best interest. Sounds great, right? This is what I wrote in response:
Dear [CEO’s Name],
Please allow me to share a few thoughts on your request as a client of [Firm Name]:
I appreciate that you believe that the Fiduciary Rule and the Dodd Frank Act are in the interests of consumers and the economy. I respectfully disagree.
Furthermore I think it is a bit irresponsible for you to advocate for these policies without admitting that  has a personal financial interest at stake.
One of the selling points for  is that your advisors are fiduciaries. I don’t need to tell you that the Fiduciary rule shook up the 401K/retirement industry and created an advantage for companies which already had a fiduciary policy for their clients. Firms like  which did not have to make the switch had an edge in selling their products.
Now as to the wisdom of the Rule itself:
Personally, I value having a fee-only advisor who is legally bound to sell the best products for me. Yet this not necessarily true for everyone. A fiduciary advisor who cannot profit from selling securities directly must earn his living by charging an explicit fee for his services. This fee-only model is not suitable for everyone — especially investors who are just starting out.
I would not have made my first mutual fund purchase as a 16-year-old if not for the efforts of a commission-only advisor who taught me about the value of compound growth. Years later, as a financially irresponsible young professional who had failed at investing on his own, another commission-only advisor set me on the path to financial independence. While management fees would have discouraged me early on, at some point, without any legislative help, I recognized the value of a fiduciary advisor, and switched to your company on my own. Yet if it were not for the initial push and value of no-fee offering, my 16 year-old-self would probably not have started on this road.
While I would not advise anyone to use a commission-only advisor today, fee-only advisors are prohibitively expensive or unknown to many people with limited access or experience with the financial system, and I don’t like the idea of a legislative solution forcing a one size fits all fix on everyone. Furthermore, while a fiduciary is prohibited from *profiting* from his advice, the law can’t make him give *good* advice, so there is no guarantee that budget fee-only fiduciary advisors will offer better financial advice than commission-based advisors.
Now as to Dodd-Frank. This legislation is complex, and has many provisions, and I think it’s an oversimplification for you to simply say that that it “protects consumers” and will “prevent recessions”:
First, surely you don’t believe that Dodd Frank prevents *all* recessions, or even major recessions, or you would not be investing my money as you are [by putting a portion in safe, recession-proof securities]. Recessions have many causes, but the most common one is government policies — and there is no reason to believe that the Fed or other government institutions are any less likely to cause a recession in the future due to this legislation.
Second, as I’m sure you know, the financial industry was already heavily regulated prior to Dodd Frank, and the Act adds several more layers. We can debate just how much protection it adds, but all the numerous prior laws (starting with Glass-Steagall, etc) failed to stop recessions, bailouts, or bad behavior towards consumers, and there is little reason to believe that this time Congress finally fixed capitalism once and for all.
In fact, all this legislation created numerous additional costs which consumers ultimately pay for, and leads to regulatory capture — the most common way for financial institutions to mask their bad behavior. Without going into technical and historical detail, I believe the Dodd Frank Act created a lot of extra costs for consumers without much additional protection. This is why most banks eliminated freebies such as free checking and the community banks’ share of the lending market fell to just 20%. Surely companies with established and fell-funded compliance departments such as yours have an easier time complying with these rules than small startups who might try to compete with you.
To conclude, I do appreciate the fiduciary policy of  and the legal protections for what others can do with my assets. Yet I dislike my money being used to advocate for overly simplistic and historically ignorant political solutions, especially when such advocacy comes with a conflict of interest.
One thought on “A letter to my broker on the Fiduciary Rule and the repeal of Dodd Frank”
Great points. I would have written one point slightly differently, though.
The paragraph that starts with, “Second, as I’m sure you know….” I would have ended the paragraph with, “…there is little reason to believe that this time Congress finally castrated capitalism once and for all.” Just a little more forceful manner of pointing out their fallacies.