Not Hold My Breath

The Fiduciary Rule: A One-Size-Fits-All Approach That Doesn't Work

The fiduciary rule, designed to ensure that financial advisors act in the best interests of their clients, has been a subject of debate since its inception. While its intention is to protect investors from potential conflicts of interest, it falls short in recognizing the complexity and diversity of individual financial situations. Let’s the flaws of the fiduciary rule, the misconceptions surrounding commissions, and the need for a more tailored approach to financial advice and investing. Before I continue, I am an absolute expert on true fiduciary-based standards. I will debate the issue with anyone, any time, and any location. And I will win.

The Flaws of the Fiduciary Rule

The fiduciary rule mandates that financial advisors must prioritize their clients' best interests, ostensibly eliminating any potential for conflicts of interest. However, this rule operates under a one-size-fits-all approach, disregarding the unique financial landscapes and needs of different investors. This lack of flexibility can sometimes do more harm than good.

Misconceptions About Commissions

A prevalent belief is that commissions are inherently bad, suggesting that advisors working on commission might prioritize their earnings over their clients' best interests. This perspective, however, oversimplifies the matter. There are scenarios where commission-based compensation can be far more cost-effective for clients.

For instance, consider a long-term investment strategy where the investor makes infrequent trades. In such cases, a commission-based fee structure might result in lower overall costs compared to a fee-based model, where the client pays a percentage of their assets under management regardless of the activity level. It's essential to understand that the effectiveness of a commission or fee-based structure depends on the individual investor's needs and circumstances.

The Pitfall of Uniform Solutions

A historical analogy can help illustrate the pitfalls of a uniform approach: fighter jet seats. Initially, fighter jet seats were designed to be fixed and uniform, leading to a high accident rate. When the seats were made adjustable to fit individual pilots, the accident rate significantly decreased. This lesson underscores the importance of customization and flexibility.

Investing and risk management are complex fields requiring personalized strategies. Just as adjustable seats in fighter jets accommodated the diverse needs of pilots, financial advice should be adaptable to cater to the varying needs of investors.

The Reality of Financial Literacy and Participation

According to data from the National Endowment for the Arts, there's a significant portion of the population that neither reads regularly nor engages in financial planning. The decline in book reading across all age groups from 1992 to 2017 is profound, with only 50.5% of the population aged 18-34 reporting reading a book outside school or work in 2017. And in the subsequent 7 years, it’s dropped further. The decline in reading correlates with lower financial literacy, as individuals less inclined to read are less likely to seek out financial knowledge.

Furthermore, nearly 50% of the population has minimal savings, limited financial knowledge, and contributes little to no taxes. This demographic is often overlooked by the fiduciary rule, which assumes a minimum level of financial competency, literacy, and engagement that simply isn't there. Nobody in their right mind expects to become rich working with poor people unless one is selling emotional trinkets.

The Future of Financial Empowerment

Empowering individuals to manage their own finances works best for those who are naturally curious, knowledgeable, and capable of connecting the dots. For the majority, self-directed financial management is impractical and unlikely to yield positive results. This reality necessitates a more nuanced approach to financial advice and regulation, but it will not happen. The assumptions are flawed but ingrained deeper than the ruts made by the wagons that went west.

To truly protect and empower investors, regulations should allow for flexibility, acknowledging that different investors have different needs. Financial advisors should have the freedom to offer commission-based services when they are in the client's best interest and to provide personalized advice that considers each client's unique financial situation. And best interest is a two-way street. With a sufficient profit, the 50% or more of the population are and will continue to be left to charities and behemoth funds that obfuscate fees like no other can.

Conclusion

The fiduciary rule, while well-intentioned, fails to accommodate the diverse needs of individual investors. By perpetuating the notion that commissions are inherently bad and enforcing a one-size-fits-all approach, it overlooks the benefits of flexibility and personalization in financial advice. It's crucial to develop a regulatory framework that recognizes the complexity of investing and the varied needs of the population, ensuring that all investors receive the tailored support they need to succeed.

But don’t hold your breath.