Skip to Content
Sustainable Investing

Should All Investment Advice Be in the Customer's Best Interest?

The ongoing controversy about a financial advisor's responsibilities.

Nothing Personal, Just Business The Department of Labor's so-called fiduciary rule, which established stricter regulations for investment advice on retirement accounts, was struck down last month in the 5th U.S. Circuit Court of Appeals. However, the court didn't prohibit government agencies from changing the laws for investment advice; rather, it stated that the agency in question had overstepped its bounds. Thus, the debate remains.

Into which Bloomberg's Matt Levine lobbed a grenade. Writing about the Wells Fargo sales scandal, created when the company's leaders set goals so aggressive that the rank and file produced false accounts to satisfy them, Levine states, "I have often gotten the impression that people think that the real scandal was that [Wells Fargo] set any sales targets, that it wanted its bankers to sell products rather than just listen to customers and give them the best possible advice for their own situation." This, Levine comments, is how it should be.

"The job of a banker is to sell banking products. The bank makes money by selling you banking products, the way a car dealer makes money by selling you a car, or a clothing store makes money by selling you clothes. When you walk into a clothing store, you do not expect the salesperson to say, 'I like the clothes you have on now, I do not think you need to buy any new clothes.' You understand that you are walking into a commercial environment, and that the salesperson wants to sell you things."

That's a new angle. Those who resisted the fiduciary rule--a group that not only included banks, but also other entities that sell commission-based funds, such as full-service brokers and insurance companies--invoked the plight of investors. Without load funds, they claimed, the small shareholder would be deprived of proper advice and forced instead to use the inferior solution of robo advisors. Indirectly, Levine reverses that argument. The reason to maintain the status quo with investment advice may not be to help the little guy but rather to protect an industry's profits.

Fair enough. I am happy to examine any defense that doesn't involve crocodile tears. Let's see how this might work.

When Fiduciaries Are Needed To start the discussion, all investment advice can't be sold on the basis of "buyer beware." It would be absurd to expect teachers, or firefighters, to be watchful consumers of their pensions--recognizing that their fund's portfolio manager might be taking care of his own needs as well as theirs, and guarding against that possibility. There is a reason why a pension-fund manager is mandated by law to act in the sole interest of participants and beneficiaries. Any other approach would be disastrous.

The same applies to 401(k)s, as well as to all other investments that are established on behalf of a participant, rather than initiated by that person. (To continue the clothing-store analogy, these would be uniforms provided by an organization, as opposed to outfits that somebody directly purchases.) Uninvolved investors will not recognize and protect against foxes. It is unrealistic to assume otherwise.

Many discretionary accounts also require the protections given by fiduciary rules. Many investors do not wish to regard their investment decisions as they would when buying an automobile, or a pair of shoes. They don't want to worry if a salesperson is misleading them. They seek professional, disinterested advice. Plenty of financial advisors are happy to comply. They accept being held to a high standard--and will charge for their services accordingly.

In other words, the marketplace demands the stipulations that come from assuming fiduciary duty. That trend will continue, with or without legislation.

The Exceptions? Which brings us to this column's headline: Should all investment advice be in the customer's best interest? As we have already established, much of it should be, either because the customer realistically is in no position to protect himself, or because the customer demands the feature of fiduciary protection, and is willing to pay for it. But "much" is not the same as all. Should there be exceptions to the general rule?

To strike a decisive note … maybe. Levine, once again, is on track. "There seems to be a widespread perception, in the general culture, that banks are evil and rapacious and not to be trusted." Yet people frequently take bankers at their word. Which, writes Levine, "is not that weird, because of course that is the impression that banks try to foster. Finance is complicated and forbidding; the commercial message of most banks is, essentially, you should trust us to look out for your best interests. This is not the commercial message of most clothing stores."

Exactly. The clothing-store comparison only goes so far. The person who offers advice on your apparel has no professional rivals who follow different standards. Wherever you shop for your clothing, the approach will be similar--suggestions about items to try and comments (usually praise) that are intended to encourage purchases. Whereas with investment advice, the bank employee who has been entered into a sales contest and who must by law do nothing more than place a customer into a "suitable" investment, resembles an advisor who is held to a fiduciary standard. Most investors do not even realize that there is a difference.

That must change. The SEC reportedly will roll out its own version of new fiduciary standards later this year, stepping in where the Department of Labor was overruled. These rules will preserve the two-class system, by leaving room for those who wish to give advice using the lower "suitability" standard. Once again, fair enough. But the distinction between the two levels of advice must become clearer. It is unfair to fiduciaries that prospective clients struggle to understand what they offer, and unfair to investors that the distinctions between the two versions of advice are blurry.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.

The opinions expressed here are the author’s. Morningstar values diversity of thought and publishes a broad range of viewpoints.

More on this Topic

Sponsor Center