Playing the Devil's Advocate By: Gabriel PotterMBA, AIFA® 2017.05.23

At Westminster Consulting, we’ve been strong advocates of the fiduciary standard – putting the best interest of our clients first – instead of the lower suitability standard.  It’s literally written into our motto, “Promoting a culture of fiduciary responsibility”.  However, we are fully aware the majority of the financial and investment industry was not built to support the fiduciary standard.  So, while we have been banging-the-drum for fiduciary practices, our peers in the industry have often been indifferent, at best, or explicitly oppositional to the higher standard.  At Westminster Consulting, we are used to going to industry and trade group conferences filled with professionals who are struggling with the new rules.  We’ve heard keynote speakers defending the lower business standards.  They’ve argued that the new fiduciary rule stems from unfair categorizations which assert Wall Street is filled with hustlers and conmen, out to rip us off while the truth is that broker/dealers and their representatives have, in actuality, nobly protected Americans with valuable advice and financial services.  

Maybe it’s time to give voice, or at least acknowledge some of the countering arguments for retaining the existing lower suitability standards.

  • First, some of this resistance is simply institutional inertia.  Staying the same is easy; making a change is hard.  Collectively, we need to do a cost/benefit analysis for consumers and their counterparts, the financial institutions, to project potential impacts, and determine if potential gain outweighs the cost of making a change. 
  • Second, there is the high probability that most broker/dealer revenues will go down while making the change to the fiduciary standard.  You can see why it would be hard for Wall Street to change their lucrative business practices. 
  • Third, it takes time and resources to alter business models and compensation schemes while increasing compliance, stifling behavior, adding regulating burdens, and generally increasing the cost of doing business. Businesses exist to make money, and a new rule which simultaneously increases costs and lowers potential revenues may be fairly contested. like it or not, incentives matter.   It is simply unnatural to expect this truth to not matter to financial firms.
  • Fourth, there is an argument that low-asset clients would not be able to get service under the fiduciary standard.  (You can see a summary of this argument here -  In short, they would have to charge a very large amount of “insurance” costs to live up to the additional risks and burdens of the higher standard, and low asset clients would get priced out or just get dropped.

There are, of course, rebuttals to each of these arguments.  As a thought experiment, perhaps you can anticipate some of these rebuttals.  As always, we will continue to vigorously support the higher fiduciary standard.





Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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