Another move to over-fiduciarize investing

Larry Ribstein —  12 August 2011

The WSJ comments on a dumb proposal by the Employee Benefits Security Administration to broaden the definition of “fiduciary” to cover brokerage services with respect to retirement accounts.

As the WSJ notes,

For decades the finance industry has provided investors roughly two kinds of services: the “advisory” model, in which an investment professional makes trading decisions, provides specialized advice and charges savers an annual fee; and the “brokerage” model, in which the saver makes the decisions and pays a fee for each trade and occasional advice. The latter model can be cheaper because the broker is often compensated by the company whose products he’s offering.* * *

The rule would have huge consequences for the retirement savings industry. Brokers would have to weigh the cost of higher regulatory compliance against staying in the business. Investors would pay more for trades and advice and have fewer investment choices. Investment educational seminars would likely halt in many cases, lest organizers think they’ll be held liable as a fiduciary for giving general investment advice.

Many firms would raise minimum investment amounts to cover their higher costs, cutting off access to lower-income savers. Consultancy Oliver Wyman surveyed about 40% of the investment retirement account market and estimated the proposed rule could “eliminate access to meaningful investment services for over seven million IRAs.” Investors could see “direct costs” rise between 75% and 195%. * * *

Moreover, the SEC is still studying the broker-dealer fiduciary issue pursuant to Dodd-Frank.  Despite its failings, the SEC is the more appropriate agency to consider this sort of move.

The big problem here is that the proposal seeks to apply a fiduciary duty to a relationship that is simply not fiduciary, resulting in massive confusion.  As I said in my recently published Fencing Fiduciary Duties concerning moves to make brokers fiduciaries:

Customers generally do not delegate fiduciary-type open-ended power that would justify fiduciary-type selflessness consistent with this article’s analysis.  Brokers, dealers, and advisers usually lack authority to commit the customer’s property without further instructions.  Nor should customers expect unselfish conduct from people who are selling securities for a commission or profit.  Thus, application of fiduciary duties to brokers, dealers, and advisers would not be consistent with customers’ expectations and would create a potential for confusion.

The Supreme Court’s recent Jones v. Harris provides a good example of the “potential for confusion” in the context of fiduciary duties for mutual fund advisors under Section 36(b) of the Investment Company Act of 1940.  I recently discussed this case and the misbegotten history of this regulation.

Another day, another industry targeted for crippling regulation — in this case smothering investor choice with a wet fiduciary blanket.  The haphazard expansion of fiduciary duties is a senseless move by a regulator that seems to have no idea what it’s doing.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

2 responses to Another move to over-fiduciarize investing

  1. 
    investingfordummies 17 August 2011 at 12:33 pm

    I don’t think advisors are unhappy with additonal regulation as much as the potential for added cost.

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