The Fiduciary Rule is the Obamacare of the Investment Industry

by Crista Huff


President Donald Trump signed a memorandum on February 3, 2017 which directs the Department of Labor to undertake a new “economic and legal analysis” of a pending piece of Dodd-Frank legislation — the new Department of Labor Fiduciary Rule — which was to be implemented in April 2017. The memorandum seeks to determine whether investors and the financial industry have been and will be harmed by the directive, in the areas of access to financial advice, access to investment products, job loss within the financial industry, changes in investment costs and increased litigation.

Many news outlets misreported that the President issued an executive order that halted implementation of the Fiduciary rule, but that was not the case. “To the extent that the new analysis reveals problems, the Labor secretary is directed to ‘publish for notice and comment a [new] proposed rule rescinding or revising the rule.’ ” (Financial Planning, February 5, 2017)

The Fiduciary Rule essentially requires investment professionals and their clients to jump through serious paperwork hoops in order to purchase investments that carry a commission in tax-deferred retirement accounts, a.k.a. ERISA accounts. Such investments could include stocks, bonds, mutual funds, CD’s, annuities, exchange-traded funds, unit trusts and more. Affected investment advisors could include insurance professionals, bank professionals, and investment professionals.

The Fiduciary Rule has already been so disruptive to business that at least one major financial company that employs thousands of financial advisors has decided to no longer allow their financial advisors to service existing retirement accounts, including IRA’s, SEPs, 401(k)s, 403(b)s, and various other types of pension plans. Please understand that the vast majority of clients at financial institutions have retirement accounts. The U.S government has purposely interrupted many millions of client-advisor relationships across the country!

The new rule had already cost the industry millions of dollars (or over $1 billion??) in the purchase of new technology as it prepared for compliance, millions of lost man hours, disrupted the daily work and career outlooks of every investment professional in the country, and caused trepidation among investors who understood that they might permanently lose their relationships with their investment professionals.

You think I’m exaggerating the cost in dollars and man hours? Ameriprise Financial spent $11,000,000 in the fourth quarter of 2016 on the Fiduciary Rule, and devoted over 500 employees to the effort. That’s just one financial company!

The Fiduciary Rule pertains to retirement investment accounts, and requires that investment advisors act as fiduciaries within their client relationships. A fiduciary is a person in a legal or ethical relationship of trust, and requires a Series 65/66 license. In the context of investing, it essentially says that the investment advisor is obligated to always put the client’s interest first; not unlike the message that is drilled into investment advisors as they go through training, licensing, and continuing education. There is a slight wording change, from the former requirement that investments are “suitable” for the client, to the current requirement that investments are in “the best interest” of the client.

To me, that sounds like a bunch of minced words, leaving me wondering what Big Brother’s left hand is doing while his right hand is pulling the strings on the “suitable/best interest” puppet, and scaring the investing public.

The Fiduciary Rule is not therefore about legality and ethics, since those basics of the profession are covered ad nauseum in the training processes. Instead, the Fiduciary Rule is an attempt to eliminate the existence of commission-based investments in favor of fee-based investments, as a means to eliminate the existence of investment advisors and the existence of investors themselves.

It should be noted that a high percentage of investors, who currently receive professional guidance and purchase commission-based investment products, do not qualify for fee-based accounts. And importantly, fee-based accounts are not cost effective for many investors. That’s why the current variety of compensation for investment advice serves the different needs of the investing public. Nobody has been forcing investors to select fees or commissions against their will. Until now.

The Department of Labor’s push to demonize investment professionals will have a net effect of destroying advisor-client relationships, and removing investors’ ability to receive professional advice, while not facilitating a path to the ostensible goal of fee-based investment products. Many investors will be left without advisors, investment education, or suitable investment products; and they will, by default, leave their cash sitting in savings accounts.


“The Fiduciary rule was one more attempt to stop wealth creation,

and deal another blow to the investment industry.” —

Lucy, a 32-year investment industry professional and fiduciary


None of this comes as any surprise to me, having seen the public education system dumb down our children by minimizing math and economic education over the decades. There is a bigger goal here on the part of the U.S. government, and it’s ugly: make sure the citizenry does not become fluent in math, economics, or investments. One excellent way to accomplish that is to remove their abilities to maintain relationships with the very investment professionals who traditionally teach investors about investment markets and products.


Commissions vs. Fees

While I realize that the media will have you believe that investment clients pay astonishing fees to snake-oil salesmen, I have a different perspective.

I was a Financial Advisor and Vice President for fourteen years at Morgan Stanley. The investment products that I provided to clients had every kind of fee or commission — or lack thereof — imaginable. The word “fee” tends to refer to accounts where clients are charged an annual fee, based on a percentage of assets under management (AUM). The word “commission” refers to a sales charge that a client pays when they purchase an investment.

I’ve always been chagrined at the trumped-up outrage that people express toward the idea that there should not be a cost involved when purchasing an investment product. Literally every product and service in the world has a profit margin that serves to pay the product’s purveyor for their time and expertise. If there were no way for a person to earn a living on providing products and services, there would literally be no point in the businesspeople pursuing their careers. Your homebuilder adds profit into the price of your home, as does your grocer, your dry cleaner, and your doctor. Why is it supposedly outrageous that an investment professional earns a fair wage???

Back to fees vs. commissions … when I worked at Morgan Stanley, there were mutual funds with up-front sales charges or declining sales charges; stocks with or without commissions; bonds and CD’s for which the investment firm paid me small fees that the clients never saw; wrap accounts with annual fees; third-party managed accounts with annual fees; annuities, life insurance and more.

Importantly, there is very little difference between the value of various types of sales charges (fees, commissions), with slight nuances based on the size of transactions or the recommended holding period on the investment. Granted, I would occasionally hear about an annuity from an obscure company with a 10% declining sales charge, but those situations were both rare, and easy for a client to avoid.

Alas, there’s a sucker born every minute. But it’s insane for our government to cite obscure and unfortunate situations, and use them as justification to create billion dollar regulations that harm all of the good and conscientious investors and advisors.

And to be clear, the type of sales charge is preordained, attached to the investment product. An investment professional does not decide what the fee structure will be pertaining to buying a mutual fund or a stock. She can steer the client toward a type of investment that has the type of sales charge that the client prefers, but she cannot remove a commission and replace it with a fee.


The Dept. of Labor has conveyed that investors with retirement accounts,

who pay commissions on investment products,

are fools who need to be saved from themselves.


You know what Big Brother is not telling you about those evil investment professionals whose clients pay commissions? Investment professionals serve their clients for the entire span of the client relationship — even if the client hasn’t made a commission- or fee-producing transaction in many years. Any self-employed person knows exactly what I’m talking about. When you are in business for yourself, developing your own client base, it is prudent to treat everybody well, because you never know who is going to walk in tomorrow to buy a widget, or to invest a million dollars. You cannot build a business by ignoring your clients, or they won’t come back, and they won’t send referrals.

The client relationship is far more important than the potential extra $40 that will land in a financial advisor’s pocket by selling an investment product with a slightly higher fee structure.

When I was a financial advisor, there were already regulations governing the appropriateness of products offered to clients, so that if I gave an inappropriate investment product to a client — something that didn’t fit their investment goals and risk tolerance — I could be fired, lose my licenses, and even go to jail.

I am now the client, rather than the financial advisor. I pay commissions on stock transactions every week, and I don’t think twice about the commissions, because my focus is this: how much money can I potentially make on this investment, net of sales charges? The sales charge means nothing to me. The net total return (capital gains plus dividends) means everything.

I personally would not want to pay annual fees on an inactive account; but would be glad to pay annual fees on an active account. There are investment products or sales charge structures that I don’t like, but it would never occur to me to demand that those choices are no longer available to other investors. Who am I to assume that my preferences should become the heavy hand of the law?! That is essentially what the Department of Labor has done with the Fiduciary Rule. They have conveyed that investors with retirement accounts who pay commissions on investment products are fools who need to be saved from themselves.


What was the motivation behind the Fiduciary Rule?

As with most things of a political nature, power tends to be at the root of the issue.

The investment industry was already highly-regulated, requiring extensive testing, licensing, and continuing education of investment professionals, let alone very high degrees of intelligence, relationship management skills and perseverance. There were plenty of potential penalties in place for investment professionals who stole money, or gave horrendous investment advice to their clients; penalties that included loss of licenses and jail time.


“In the beginning the organizer’s first job

is to create the issues or problems.”

— Saul Alinsky


Why, then, would politicians promote new government regulations that mirrored a consumer protection process that was already in place? Here are some possible answers:

  • The primary concern for most Congresspeople and Senators is their reelection. What better way to get reelected than to invent a problem, scare the constituents about the problem, then tell them that you will be the saviour who rescues them from the scary problem?

  • There are forces within U.S. government that revile capitalism, and seek to destroy jobs and industries. Their motivation is power. When people lose jobs and income, many eventually are forced to rely on the Federal government for their basic needs. While that is incredibly costly for the Federal government, it creates a dependence on the part of the citizenry that has lost its ability to survive without Big Brother’s welfare checks and food stamps. Thus, when the general elections roll around, the dependent citizenry votes for the people who have promised to keep giving them free stuff. The elected officials retain their power over an ever-growing dependent population.


“The administration spent every non-golfing moment

trying to eradicate capitalism.”

— Lucy, a fiduciary


Private Right of Action

One harrowing aspect of the Fiduciary Rule is the private right of action, which dramatically increases the ability for investors to sue investment advisors. And we’re not talking about client redress, because the financial industry already had many remedies in place for dealing with rogue brokers. The Fiduciary Rule enhances the likelihood that random investors — the types of people who will sue nearly anybody who they think they can take advantage of — will sue their financial advisors.

Those lawsuits destroy people’s lives, because it is relatively easy to sue, or file charges against, just about anybody in the U.S., and it’s then up to the defendant to prove that they are not guilty. Does that sound opposite from what you’ve always heard, “innocent until proven guilty?” That’s a laugh … ask anybody who’s ever been a defendant in a civil or criminal case.

The specter of class action lawsuits is causing many financial professionals to leave the industry. Even the most frivolous lawsuit can cost the defendant tens of thousands of dollars, which the vast majority of citizens simply cannot afford. Other costs include lost productivity and income, as financial professionals work on their legal defenses, rather than serve their clients and grow their investment practices; the health effects of heavy stress loads; and even divorce and bankruptcy, because many marriages and household budgets cannot remain standing under the seriousness of a legal and financial assault.

I can personally attest that the threat of lawsuits coming from unstable clients was a constant worry during my time at Morgan Stanley. When I retired from the job, it was a great relief to me to no longer have to worry which client might accuse me of something. (For the record, no client ever filed a complaint about me, but I’d seen enough such instances to know that once you’re sued, you’re screwed.)

Ironically, a few short years later in my personal life, a career criminal illegal alien filed false charges against me, in order to avoid his own arrest. It took me 18 months and $13,000 to get past the ongoing situation, and fully ten years to begin living somewhat similarly to the life I had before the criminal encounter. So if you’re laughing at the idea that random people can destroy lives with unfounded lawsuits, I would doubt that you’ve ever worked in the private sector.


Lucy’s Story

One investment professional who I interviewed, who I’ll call Lucy, was forced to change investment firms after 32 years in the business. That’s because her employer made the decision that it would be easier and less costly to send all of the clients’ retirement accounts to a call center, rather than train and license thousands of investment professionals to become Fiduciaries or to get Best Interest Contract documents signed by clients, as demanded by the new rule.


“It has been 2 years of literal Hell — ongoing confusion,

meetings, and worry not only for investors but for the industry.”

— Lucy, a fiduciary


To be clear, according to practices that were forced upon Lucy’s former investment firm by the Department of Labor’s new Fiduciary Rule, my 83-year-old Dad’s six-figure IRA account would have been transferred to a call center, with non-financial, uneducated phone clerks answering 800 numbers, ready to deflect all of his important investment questions such as:

  • “How is my account doing?”

  • “When should we take my mandatory withdrawal this year? Do I have anything coming due that will provide that amount of cash, or should we sell something?”

  • “I’d like to buy low when you think the current market correction has reached a bottom. Are we there yet?”

  • “What’s looking good in AA-rated corporate bonds today?”

  • “How much longer will my money last if it grows at 8% per year and I continue to withdraw $34,000 per year at a 2% inflation rate?”

Can you imagine your elderly friend or relative speaking with a phone clerk, after 50 years of normal, intelligent relationships with investment professionals, and suddenly being told “no” and “I don’t know” and “we don’t do that here” in a foreign accent? You already know what it’s like to speak to an AT&T representative, and agree on a phone plan, only to discover, upon receipt of your first monthly bill, than none of the phone plan details or prices are the same as what you agreed to over the phone.

Can you imagine being the elderly citizen who’s forced to put your life savings into the hands of a foreign-accented phone clerk who can press the wrong button and move thousands of dollars around in your account, which you don’t discover until your paper statement arrives???

A friend of mine, a fiduciary who is the president of a wealth management firm, referred to the call center solution as “kicking people out onto the street, and telling people that ‘no help’ is better than ‘flawed help’.”

Imagine being Lucy, working with several generations of hundreds of families, for three decades, and then one day telling them, “My investment firm says I can’t continue to advise you on the investments in your retirement accounts anymore. You’re going to have to deal with a phone clerk on an 800 phone number.” Ironically, Lucy was already a fiduciary! But when the firm made the decision to kick the retirement clients to the curb, Lucy was forced to make a devastating career decision. Lucy changed investment firms, said goodbye to her wonderful assistant of 10 years, gave up valuable retirement benefits, and transferred her clients’ accounts to a company that would allow her to continue to service her clients.


“I am a fiduciary and have met the requirements of the rule since the 1990’s following two years of education and passing a many-hour long Federal licensing exam. [The Fiduciary Rule] was designed to punish an industry, [along with] over 100 regulations coming out of Dodd-Frank.” — Lucy, a fiduciary

“I changed from a highly respected firm after 10 years to a registered investment advisory (RIA) in order to be able to do my best for clients. I had to just walk away from so many people I have watched build their lives over decades. It has been heart breaking. Terrible pain. Terrible.” –– Lucy, a fiduciary


But not all of Lucy’s clients were able to transfer. Lucy had a significant client base that included expatriates who cannot legally transfer to her new firm without completing lengthy paperwork and embassy visits. And I know from personal experience than when an investment professional changes firms, there will always be a certain percentage of the client base that does not make the change, for myriad reasons. So Lucy was essentially forced to decide between staying at her former investment firm, but watching accounts from every family go to a call center, thus fragmenting every single family’s investment plan and supervision; or transferring much of her client base to a new investment firm, while leaving behind many dozens of families who she’d advised and adored for decades.

Let me assure you that changing investment firms is a nightmare. I stayed at Morgan Stanley for fourteen years, despite lucrative offers to change firms, simply because I didn’t want to spend the next six months (a) preparing account transfer paperwork, (b) bugging clients for signatures on account transfer paperwork and (c) not doing much investment work because of the paperwork nightmare. I cringe at the amount of stress and work that Lucy took on when she changed firms.

In addition, Lucy’s income was cut in half. Lucy’s income is derived from fees based on her assets under management (AUM). When an investment professional changes firms, many weeks or months go by before the assets successfully transfer, during which time she earned very little money. In addition, many client families either did not transfer or could not transfer, which meant that Lucy’s eventual AUM at the new firm would be substantially lower than it had previously been. What’s more, the need to change investment firms was sudden, giving her no time to change her budget and lifestyle to accommodate a significant change in her income stream.


“A long and dedicated career has been turned upside down.

My life will never be the same. Not sure my heart will ever heal.

My clients are confused and unhappy and my heart is broken.”

— Lucy, a fiduciary


Additional Efforts to Stop Implementation of the Fiduciary Rule

Chief United States District Judge of the Northern District of Texas, Barbara Lynn, plans to make a decision by February 10 on a lawsuit that was filed in June 2016, which seeks to stop implementation of the Fiduciary Rule. Litigants include the Financial Services Institute (FSI), the Securities Industry and Financial Markets Association (SIFMA) and the U.S. Chamber of Commerce.

Legislation to delay implementation of the Fiduciary Rule was introduced in Congress by Rep. Joe Wilson (R-SC). Separately, Chairman of the House Rules Committee, Rep. Pete Sessions (R-TX), wrote to President Trump, requesting him to delay implementation of the rule. (Financial PlanningFebruary 2, 2016)

You’ve seen serious attacks on American industry in recent years, and it’s always an attack on private industry — never an attack of government agencies or the public education system or the judicial system. What are the odds that all of the good people work for the aforementioned groups, all of the bad people work in private industry, and the government is righteous in its attacks on energy, coal, ranchers, farmers, healthcare, banks … and now the entire financial industry? Clearly, there is a seriously destructive situation happening in the U.S. There’s still time to halt the assault on the private sector, but there’s no time to waste.


“If this country can relearn what a great thing capitalism is, there is hope.

But I fear way too many are totally lost to socialism or worse.”

— Lucy, a fiduciary


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Crista Huff is a stock market expert, and an advocate for balanced trade and a strong U.S. economy. Send questions and comments to







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