A Debate on DOL Fiduciary Rule with Tom Hegna and Knut Rostad

[nylife11023]

Nylife, you are completely mistaken.

Of course I'm completely mistaken. What else would or could I be in a venue where the only allowed and correct POV is that of the beholder. So we agree on that.

You cannot legislate ethics. You cannot make someone be ethical. You can punish them for being unethical and some you can force into ethical behavior only because their fear the consequences. It still doesn't make a person ethical, it just means they fear the punishment more than the gain of being unethical.

I don't think anyone cares if someone IS ethical, all they want is for them to ACT ethical when it comes to giving financial advice. You don't think that can be done? If not, then why would I trust you or DHK or anyone to give me advice on investments? If you are telling me "Invest your money in this, and that, and the other thing, and this is definitely good for me because I make a lot of money on the sale, but you probably will lose it all," what is my incentive to take your advice? Why is it so unrealistic for me to expect you to be honest. And if you are intrinsically not honest, why is it unrealistic for me to expect that you will be made to be honest by fear of punishment? I know what my fears are. I don't quite understand what your's are.

You also seem to take this as being opposed to standards for RIAs, I don't think anyone is opposed to standards. The question is, which is the correct standard?

OK. Then sit down and WRITE standard that you would agree to abide with and post it here. How hard can that be? I'm sure you can do this in ten minutes or so. You know the issues better than you seem to think I do.

One thing I do agree DHK about, because we have already seen it in the larger investment world, this is going to hurt the people it was intended to help. There is no point in taking on smaller clients as the reward is simply not worth the risk taken. They will be abandoned to their own devices or to robo advisors, if they will do it.

I keep hearing this 'scare tactic' all the time, but I've yet to see any metrics to support it. If a guy walks into your office with only $15,000 to invest you would turn him away because there is too much risk? If so, then come up with a standard that would mitigate that risk to an acceptable level.

I have to tell you this. From the sound and fury that so many advisors are making against any fiduciary standard makes me and I assume others believe that the whole lot of them are intrinsically dishonest.

Of course, I also question just how much value RIAs really deliver, but that is a completely different subject.

They at least deliver a modicum of 'peace of mind' since they DO work under the fiduciary standard.

I get a smile over the fact that you are all fine and dandy with lawyers and CPAs working under a fiduciary standard, but OMG, the horror, the horror if you should have to do so as well!

 

[VolAgent]

Of course I'm completely mistaken. What else would or could I be in a venue where the only allowed and correct POV is that of the beholder. So we agree on that.



I don't think anyone cares if someone IS ethical, all they want is for them to ACT ethical when it comes to giving financial advice. You don't think that can be done? If not, then why would I trust you or DHK or anyone to give me advice on investments? If you are telling me "Invest your money in this, and that, and the other thing, and this is definitely good for me because I make a lot of money on the sale, but you probably will lose it all," what is my incentive to take your advice? Why is it so unrealistic for me to expect you to be honest. And if you are intrinsically not honest, why is it unrealistic for me to expect that you will be made to be honest by fear of punishment? I know what my fears are. I don't quite understand what your's are.




OK. Then sit down and WRITE standard that you would agree to abide with and post it here. How hard can that be? I'm sure you can do this in ten minutes or so. You know the issues better than you seem to think I do.



I keep hearing this 'scare tactic' all the time, but I've yet to see any metrics to support it. If a guy walks into your office with only $15,000 to invest you would turn him away because there is too much risk? If so, then come up with a standard that would mitigate that risk to an acceptable level.

I have to tell you this. From the sound and fury that so many advisors are making against any fiduciary standard makes me and I assume others believe that the whole lot of them are intrinsically dishonest.



They at least deliver a modicum of 'peace of mind' since they DO work under the fiduciary standard.

I get a smile over the fact that you are all fine and dandy with lawyers and CPAs working under a fiduciary standard, but OMG, the horror, the horror if you should have to do so as well!

It appears I hold myself and those I do business with to a higher standard than you hold yourself.

I do the right thing not because I am afraid of going to jail but because it is the right thing to do.

I could write a standard in 5 seconds, but it is meaningless because how do you turn it into a regulation? "Do unto others as you would have others do unto you." or "What would I do if I were in the other person's situation with my knowledge?"

It is sad, but I'm not surprised you don't get this. Ethical people do what is right and ethical because it is just, not because someone makes them. This goes to the heart of insurance and what I was taught as a child.

Insurance is just a promise, that is all it is. If I have to take you to court to make you uphold your promise, then your promise was meaningless. To me that is the end all, be all. Now, there will always be disagreements over what promise was made, but the core promise should be upheld.

You seem to think the fiduciary standard is the end all be all, it isn't.

The other day a friend that is an attorney gave me a call. The church on my street was considering trying to close part of the street. There had been a huge fight over it years ago when my grandmother owned the property. He wanted to know my view before he agreed to work on it. Legally he didn't have to ask and it didn't matter what I thought. But he called and he declined to work on the case when I told him my view.

To me, that is doing the right thing because it is right. He decided it is better to keep a friend than to take business that might put him at odds with the friend.

That is the standard I think we should all hold ourselves to, but how do you put that in a regulation that is meaningful and can be complied with?

 

[DHK]

I don't think anyone cares if someone IS ethical, all they want is for them to ACT ethical when it comes to giving financial advice. You don't think that can be done? If not, then why would I trust you or DHK or anyone to give me advice on investments? If you are telling me "Invest your money in this, and that, and the other thing, and this is definitely good for me because I make a lot of money on the sale, but you probably will lose it all," what is my incentive to take your advice? Why is it so unrealistic for me to expect you to be honest. And if you are intrinsically not honest, why is it unrealistic for me to expect that you will be made to be honest by fear of punishment? I know what my fears are. I don't quite understand what your's are.

You obviously have never advised or counseled others on investments at anytime based on this mindset.

With securities, it's all about managing expectations. There are 3 factors at play when choosing investments:
- risk (in relation to appropriate benchmarks based on past MPT statistics)
- potential return (in relation to potential market movement)
- cost to invest

When you have a PROCESS that outlines everything, and you have done a risk tolerance assessment of some kind, NOW you are ready to present the portfolio or mutual fund allocation that you recommend... NOT before.

This regulation ASSUMES that everyone is just "pitching" their favorite investment (or annuity) to everyone, and that's just not the way that any PROFESSIONAL would do it.

OK. Then sit down and WRITE standard that you would agree to abide with and post it here. How hard can that be? I'm sure you can do this in ten minutes or so. You know the issues better than you seem to think I do.

Already done.

Here is the standard that I have already applied to myself and signed on record with The American College:

https://www.theamericancollege.edu/sites/default/files/enforcement-procedures.pdf

The Professional Pledge
“In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surrounding those I serve, which I shall make every conscientious effort to ascertain and understand, render that service which, in the same circumstances, I would apply to myself.”

I keep hearing this 'scare tactic' all the time, but I've yet to see any metrics to support it. If a guy walks into your office with only $15,000 to invest you would turn him away because there is too much risk? If so, then come up with a standard that would mitigate that risk to an acceptable level.

$15,000 to invest is far too little information to determine if this person is even READY to invest. I would have to go through a PROCESS to determine if investing is appropriate for that person... or not.

Why go through the process? Because it's MY LICENSES AND LIVELIHOOD on the line... and in the end *I* get to choose whether or not to take on this person as a client... or not.

And yes, I've turned away people who had more money than that, because it wasn't the right fit.

I have to tell you this. From the sound and fury that so many advisors are making against any fiduciary standard makes me and I assume others believe that the whole lot of them are intrinsically dishonest.

No, the whole system is set up to where the advisor is GUILTY until proven INNOCENT.

They at least deliver a modicum of 'peace of mind' since they DO work under the fiduciary standard.

I get a smile over the fact that you are all fine and dandy with lawyers and CPAs working under a fiduciary standard, but OMG, the horror, the horror if you should have to do so as well!

CPAs operate under a uniform standard of accounting (typically GAAP, but there are others). There is NO 'uniform standard' for dispensing financial advice. It all depends on the expertise (or greed) of the person dispensing that advice.

The industry already has mechanisms in place to deal with fraud and unsuitable investments. And those mechanisms usually require firms and reps to 'settle' the complaint, if it has merit. The firms pay and the reps pay.

The system is NOT broken! Until you unleash the word 'fiduciary' and who salivates after that word? Trial lawyers. Who will simply increase the costs of doing business. That means less people to serve the public and those with little means will simply have to use discount brokerages or RIA robo-asset-allocation-advisors.

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I have had people come into my office in the past with statements from another firm/advisor and said "what can you do for me?"

I looked at the account and it was $30,000 and was in a balanced fund, class B. Not a completely inappropriate investment - although B-shares are practically non-existent now.

I asked a few questions and asked to make a copy of the statement. When the prospective client left, I called the broker of record. The broker was with a bank division, and normally doesn't accept clients with less than $100,000... but he did so because of a client referral. He told me that he explained different kinds of accounts - fixed annuities with guarantees, to mutual funds, etc.

Well, the client got confused and thought that the mutual fund had guarantees. The firm agreed to make her "whole" and get out of the investment - just to avoid trouble/litigation/whatever. He told me to be careful with her.

At the time, I thought about a variable annuity with a living benefit rider... and I presented it, but she got confused, so I recommended that she just put the money in the bank.

Clients have selective hearing and selective memories. If this was a situation under a 'fiduciary rule', the broker would've been brought to court because of the CLIENT'S misunderstanding and confusion.

Not everyone thinks of investments in a logical and rational way. That's why the public needs advisors - to help them make good decisions and stay the course. But they don't always remember why they bought what they bought.

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What would 'punitive damages' look like to a large firm if the client decided to sue for 'breach of fiduciary duty'? That would be far more lucrative than to just ask for their money back and to be made whole.

 

[nylife11023]

You obviously have never advised or counseled others on investments at anytime based on this mindset.

You folks have a level of clairvoyance that I've not seen anywhere else in that so many of you know without any uncertainty what I or anyone else here has done in the past. I wonder if any of this carries over to the future? Can you tell us what the Dow will be in a month from now?

As for mindset, it is obvious (to use DHK's word) that he is a sycophant of the advisory industry.

Here is the standard that I have already applied to myself and signed on record with The American College:

https://www.theamericancollege.edu/sites/default/files/enforcement-procedures.pdf

The Professional Pledge
“In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surrounding those I serve, which I shall make every conscientious effort to ascertain and understand, render that service which, in the same circumstances, I would apply to myself.”

This is basically word-salad, a nice spin used to avoid saying in plain and simple terms that you will work in your client's best interest, and not in your own.

So you will apply the services to your client as you would yourself? What if you are a liar and a cheat? Oh wait. Silly me. There are no liars or cheats in the advisory community which is why there is no earthly reason for there to be a fiduciary standard.

The only liars and cheats are in the legal and accounting professions which is why we really have to force them to work as fiduciaries. But advisors are always intrinsically honest and so there is no need to hold them to such a standard.

I have a great deal of respect for DHK, but on the issue of the need for a clear cut fiduciary standard for his sector I simply disagree with his analysis that it is not needed and cannot be enforced.

The more opposition I hear from the advisor community about working under a fiduciary standard the more I believe such a standard is desperately needed.

If you can't stand in front of me as my advisor and tell me that you will always work in my best interest and never in your own, you are surely not the advisor I would want to take advice from.

DHK and others obviously diverges from that position. I don't understand why but as it has been pointed out to me so often in this discussion, I'm really not as smart as the rest of you.

There is no convincing you otherwise, so perhaps it is best to leave it at that and just move on.

Henry VIII | Act 5, Scene 1

 

[DHK]

I just got the following follow-up email from Tom Hegna:

Last week, Knut Rostad, Co-Founder of the Institute for the Fiduciary Standard, and I debated the implications of the DOL Fiduciary Standard Rule. Knut argued in favor, while I opposed it as being detrimental to more than 80% of Americans, who I believed would be hurt by the ruling.

It all started when I was approached a couple of months ago by the hosts of AP Viewpoint to see if I had an interest in participating. I certainly was interested in strongly voicing the views of the many financial professionals I've spoken to about this subject.

There were some basic rules of the debate, but I had never spoken to Knut until the day of the debate. Neither of us were able to see the others talking points in advance. Prior to the debate, I researched Knut so I'd know a little more about him. I found out he's a really smart guy who passionately believes in the Fiduciary Standard. I think he found out that I, just as passionately, believe the opposite.

In a world of the "Prudent Man" theory and the "Common Sense Rule", isn't it interesting that two very prudent people, who both have common sense, can't agree on what is truly in the "best interest" of someone? In fact, multiple Fiduciaries when presented with the same fact set, can make totally different recommendations to a client on what is in their "best interest". Hmmmm, isn't that interesting?

We started and we each had 3 minutes with our opening statements. Trust me, 3 minutes goes like a blink of an eye, and we both got called out at the 3 minute mark at least once in the debate. Anyway, I read the DOL rule and studied articles on both sides of the issue. I made my arguments simple and to the point. I used some analogies and Knut did too. I tried to not attack Knut but attacked the issues. Opening statements were followed by a 3 minute rebuttal by each. Then Robert Huebscher, the moderator, began asking us each questions. Now realize, neither of us had seen the other's talking points nor the questions. The questions just kept coming! After the questions, we finished with closing remarks.

Instead of trying to drive my points home to "win" the debate, I attempted to find common ground. I proposed a simple, common sense solution that I hoped EVERYONE could agree on. A solution that is based on math and science, not opinions. I hoped that it could be a path forward for all sides. We will see.

The entire process was a learning experience for me and it showed me why now, more than ever, financial professionals need to be on the top of their game. You can't just "wing it". You have to have a process in place, not just sell products.

Hope you enjoyed the debate!

-Tom

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https://www.onwallstreet.com/news/fiduciary-rule-makes-finra-arbitration-tougher-for-advisors

The Labor Department has made clear that IRA rollovers from ERISA accounts will receive closer examination, even if the IRA has level fees, he notes. The agency also warned of so-called reverse churning cases, in which clients could seek damages from advisors for even small management fees in accounts with passive strategies.

“The DoL is putting advisors in sort of in a difficult position. What if you have a buy-and-hold investment objective for a customer?” Temkin says.

“You may see some pushback on these claims because I think it would be unfair to advisors to put them between a rock and a hard place. The advisor is going to have to explain why the compensation is in the best interest of the customer.”