For viewers of the timely PBS FRONTLINE program called “The Retirement Gamble,” the U.S Department of Labor’s recently passed fiduciary standard rule for retirement savings advisors may be the closest rule passed to date to that which has been prescribed for decades now by well-respected Vanguard founder John Bogle. If you have ever been sold a “lemon” automobile, a “liar’s loan,” or “some lovely property in Florida” that turned out to be swampland, then you might now finally rest assured, knowing that this final rule will at least serve as an after-the-fact preventive safeguard for future generations of potentially looted investing individuals. As the proponent of “a Bogle rule for financial advisors” has pointed out, high-fees applied to Americans hard-earned savings are simply unnecessary.
“Fiduciary” derives from the Latin words fiduciarius, fiducia and fidere, with the latter meaning to trust. According to Stanford law professor Lawrence Friedman, the whole concept of “fiduciary duty” developed from chancery courts applying a standard of trust to trustees “who managed money for widows and orphans.” Notable figures beyond Friedman, in the legal profession, mutual fund industry and public policy arena have all simultaneously advocated against the current state of affairs in financial advice, as justified by recent experience, e.g., criticisms of “assignee liability” in mortgage securitizations, conflicts of interest at front and center in the famous “Abacus” securitization and excessive, high-fee 401(k) investment accounts offered by employers as part of defined contribution plans. The “unsegregated accounts” breach with former New Jersey Governor Jon Corzine and his company MF Global, also illustrates the general importance of the critique at hand. Specifically, William Brennan, Jr., retired Atlanta Legal Aid director, John Bogle, retired Vanguard founder, mentioned previously, and Ken Arrow, the well-respected Stanford economics professor and Nobel laureate, have all criticized the industry, respectively: (1) “The Georgia law that might have forestalled the foreclosure crisis;” (2) “John Bogle: The “Train Wreck” Awaiting American Retirement;” and (3) “Economics and Inequality.”
According to Federal Register language included alongside the final rule, a “1975 regulation was adopted prior to the existence of participant-directed 401(k) plans, the widespread use of IRAs, and the now commonplace rollover of plan assets from ERISA-protected plans to IRAs. Today, as a result of the five-part test, many investment professionals, consultants, and advisers have no obligation to adhere to ERISA’s fiduciary standards or to the prohibited transaction rules, despite the critical role they play in guiding plan and IRA investments.” Therefore, the rule acts close that previous gap in fiduciary standard. Furthermore, it explains that “Financial Institutions and Advisers must adhere to basic standards of impartial conduct.” Specifically, “the Adviser and Financial Institution must give prudent advice that is in the customer’s best interest, avoid misleading statements, and receive no more than reasonable compensation.” At the press conference announcing the final rule, an impact estimate was advanced that the average American could be spared roughly three years of work due to the extra savings retained as a result of the rule’s implementation.
Even while Sen. Angus King, the Independent from Maine, and John Bogle himself have called for reasonable adjustments to the final rule in order to make it more principles based and less thwarting toward good competition in the industry, the general “spirit of the rule” appears to be in the right direction, that is, placing financial experts on a more professional footing with a narrow objective of the customer in mind formally stated—an ultra vires doctrine for an important industry that is multiples larger than the real economy.
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