Fiduciary Rule: Can't Legislate Morality

People who give investment advice to others should be honest, transparent - and put their clients' interests ahead of their own! Who could argue with that? It's called the Fiduciary Standard, and all registered investment advisors (RIAs) already accept that responsibility.

And now, stockbrokers and insurance investment salespeople will also have to abide by the Fiduciary Standard. Until now, they were only bound by a "suitability" rule - one that protects them as long as the investment was "suitable" for the client, even if it was far more expensive than another product that did not pay them a commission or reward of some type.

As a long-time consumer advocate in the financial service industry, I have applauded the Department of Labor's new ruling which will go into effect in 2017 - just in time to help boomers who are retiring and about to roll out of their 40l(k) plans and into IRAs. Now they will have a better chance of receiving advice they can trust, instead of being rolled into high-commission, expensive products.

At least, in theory they will get trusted advice.

In practice, they may have fewer choices and pay more - to offset the industry's costs in complying with the new Fiduciary Standard. That's not an argument against the fiduciary standard, or in support of the brokerage and insurance industry. The industry has gone too long and too far down the road of selling clients investment products that bring the industry big profits and cost investors too much.

But it would be naïve to think that investors won't be the ones to eventually pay the costs of this new law. Here's how it will happen:

Costs: Instead of paying upfront commissions on products, it's likely that clients will pay annual fees. Over time, those may add up to more than even the outrageous (and hidden) commissions many pay today. Certainly, the costs of regulatory burdens in complying with the law will be passed on to investors.

Accessibiity of Advice : The higher compliance costs may put some smaller advisory firms out of business (just like small banks after Dodd-Frank). That may limit personalized investment advice - though robo-advisors may be less costly and appropriate for smaller accounts.

Liabilities: One other potential cost has yet to be quantified. Along with new regulations, come new legal liabilities. The current requirement that securities disputes against brokers be settled by arbitration may not be the best or even the fairest plan. But the door has been opened for huge and costly litigation since the new rule allows "private course of action," following the precedents for lawsuits and even class action suits in cases against fiduciaries. You can hear the tort bar salivating!

The consumer of financial products and advice needs protection. The Fiduciary Standard is a step in the right direction. But if there's one thing we've learned over the years, it's that government doesn't take into account the unintended consequences of its policy-making.

Sometimes, letting the government "protect" us seems like a great idea. Think Dodd-Frank or Obamacare. Who could disagree with regulating banks to keep them from causing another financial catastrophe? Who could disagree that everyone should have affordable healthcare?

Similarly, who could disagree with a Fiduciary Standard requiring financial advisors to be open and honest? But let's see how this plays out to the benefit of consumers over the long run. This legislation can't "save" retirement plans. Remember, you can't legislate morality. And that's The Savage Truth.