The Fiduciary Rule, Dead? Living?

In the waning days of the Obama administration, he used the Department of Labor to pass what’s known in wealth management circles as, “The Fiduciary Law”.  Because Atlas Shrugged language has become part of our government vernacular, if you only read headlines you will think that investors are now at risk.

They aren’t.

The fiduciary law related to how investment advisors and firms could charge fees to clients.  As soon as it was passed, the finance industry was up in arms.  Why would the government use an agency like the Department of Labor to regulate the financial industry when the SEC or FINRA was the proper place to do it.  This was bureaucratic over reach to the nth degree.  However, the spirit if what the DOL was proposing was not terrible.

In some cases, there were incentives on the part of brokers to charge a lot of commission to clients.  The DOL ruling forced everyone to basically begin charging on the amount of assets someone had, or what we in the business call “bips on AUM”.  That’s basis points on assets under management.

Blanketing this regulation is wrong too because in some cases just charging a commission to a client is better for the client and more efficient for all parties.  One size fits all when it comes from the government doesn’t work most of the time.  Paying one fee doesn’t insulate you from conflicts of interest.  It also might cost you more.  For example, I invest in indexes and am a passive investor.  Why should I pay 1% to someone on my AUM when I am not doing anything?

If I seek out an advisor and ask him to do something for me, that person ought to be able to charge a commission to me if I do it.  Under the DOL regulation, that would have been more difficult.

One of the portfolio companies I am invested in is Riskalyze which benefitted from all this talk about risk.  Another is Ycharts.  Ycharts really helps advisors decrease their overhead and costs while giving them a lot of power for research.  Recently, our fund invested in Holberg Financial.  They provide financial education and relieve financial stress for employees.  I don’t think any business will be affected by the change in the regulation.  I also don’t think the change will affect any business plans of startups.  If you set out to help consumers in finance and you have good ethics built into your business, you won’t have a problem.

I do think it would be nice if the government used more “principled” based regulation systems than rule based.  The CFTC is a principles based regulator.  There is more Socratic method to the way they regulate and it tends to work a lot better for the end user.