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The Blue Ocean Portfolios blog covers various financial and investing topics such as retirement, investing, indexing, financial advising, and more.

There Are No Angels Walking Around Down Here

No Angels When it Comes to the Fiduciary Standard

The Fiduciary Standard that was set to take effect in April is nothing less than an "Angel Law" whereby brokers and advisers would be required to always be Angels when dealing with the retirement accounts of their clients. Here is the problem with that: there are no Angels, and enforcement of this Fiduciary Standard would enable regulators to charge any advisor they wanted to go after. Why? Because no one is an Angel, and there will always be a way for an administrative enforcement agent to prove that any broker or advisor is no Angel. This bureaucrat would not need to prove that the advisor was a Devil, but that they were not the Angel that the law would require them to be! It’s impossible for the broker or advisor to mount a defense and thus to enable regulators to pick and choose any advisor they wanted to go after and most likely win. More importantly, the Fiduciary Standard would have a negative impact on the clients and the economy overall. Let’s take a closer look.

Since the 1930's, investment brokers have been held to a suitability standard. A broker can only recommend investments that are "suitable" but not necessarily in the best interest of the client. The suitability standard enables brokers to recommend new stocks and bonds where the broker is actually working for the issuer of the newly issued security, and the broker is paid by the issuer - not their client/purchaser. This practice is a conflict of interest because it would be impossible for the broker to represent the best interest of the issuer/seller while at the same represent the best interest of the client/purchaser. Also, the suitability standard enables a broker to recommend the purchase and sale of OTC stocks and bonds to their client out of their inventories - enabling efficient trades that again are suitable but not necessarily in the client's best interest.

These healthy conflicts of interest result in the efficient formation of capital and liquid markets that has led to the remarkable prosperity that we all enjoy today. The imposition of the Fiduciary Standard would eliminate all of these new issues and inventory trading activity from IRA and retirement accounts. How can that be good for the country or even the client?

Right now an investor has a choice of three different avenues:

  1. The investor can have their IRA at their brokerage firm and be aware of the conflicts of interest, while also understanding that there could be a compensation bias on any advice that the broker provides when it comes to the purchase and or sale of an investment product.
  2. The investor can hire an investment advisor who already acts under a fiduciary standard and does not sell any investment products. These investment advisors charge an ongoing small fee to manage a portfolio in the clients’ best interest.
  3. An investor can choose to manage the investments themselves through online brokers. Also, advisors can choose what type of firm to work for that would be the most conducive with their philosophy, either to operate under a fiduciary standard or suitability standard. This does not mean that one is better than the other. You cannot participate in the next IPO through your fiduciary driven advisor; of course depending on what happens to the stock that could be a good or bad.

Meaningful choices already exist, and the consequences of this government imposed fiduciary standard would have extraordinary negative implications both for the IRA/retirement clients and the overall economy. A bad broker or advisor is not going to last long, and if they actually wronged a client, the client has recourse whereby they would need to prove that the representative or company that they were dealing with actually did them wrong. Maybe a simple rule that would require the investment firm to provide a clear disclosure of how and when they are getting paid to every client would be an effective compromise. An informed citizen base is by far more effective than any law that requires someone to be an Angel – which is impossible!

Our final point compares doctors’ practices with their patients. Do you really think that the advice that doctors give to their patients is not influenced by the pharmaceutical and medical device companies? Again, there are no angels walking around down here.

Blue Ocean Portfolios was designed to operate under the fiduciary standard. We do not participate in any revenues generated by the transactions in our client portfolios. Therefore, there is no compensation bias influencing which securities our clients hold in their accounts. While this does not guarantee better outcomes, it would imply that there are better odds when compensation conflicts are eliminated.

Charlie Brennan Talk Show with Jim Winkelmann

Click here to listen to Jim Winkelmann, founder of Blue Ocean Portfolios, discuss President Trump’s end to the implementation of the Fiduciary Standard rule on the Charlie Brennan Show.


Contact us now if you have any questions or comments about the fiduciary standard.

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