I admit it, sometimes I get worked up.
Especially when it seems that unsuspecting investors, retirees, and anybody else who’s trying to navigate the capital markets in pursuit of the American Dream is about to get fleeced – again – by Wall Street.
A perfect example: getting all worked up over Wall Street’s attempts to kill the Labor Department’s Fiduciary Rule, which is supposed to go into effect this April.
But you can’t let this stuff get to you. Because Wall Street is always trying to find the next end-around that will allow them to skirt the most expensive regulations.
It’s better to try and come up with simple, common-sense solutions to stop the Street from squirming through whatever loopholes they can find.
Well, I found one. And it would save us all a lot of hypertension and sleepless nights.
The Rule Isn’t Perfect – But It’s Better Than Nothing
I’ll admit – as I’ve done before – that the Fiduciary Rule isn’t perfect.
Despite the more than 1000 pages the Rule takes to essentially say that brokers need to put their clients’ interests ahead of their own, it’s a prudent approach to a confusing issue.
That issue amounts to the difference between brokers and investment advisors.
They are held to different “standards” when it comes to their clients.
Brokers have to put their clients into “suitable” investments, or trades, or products, while investment advisors have a fiduciary duty to put their client’s interests ahead of their own pecuniary interests.
But President Donald Trump signed an Executive Order in early February delaying the implementation of the Fiduciary Rule. The president’s deregulatory army has a good mind to kill it once and for all – for the good of the public (supposedly) and for the good of Wall Street (for sure).
I’ve written here about how the Fiduciary Rule makes perfect sense and why killing it is flat-out wrong.
Fortunately, I found a simple solution to me getting worked up over the Rule getting waylaid and Wall Street getting around prudent, if not insanely longwinded, regulations meant to protect the innocent…
An Easy Fix
It’s a simple disclaimer written by a smart securities attorney – Harvard undergrad and NYU Law kind of smart – that I discovered on the irreverent and often hilarious securities industry blog www.BrokeAndBroker.com.
Aegis J. Frumento, co-head of the Financial Markets Practice at Stern Tannenbaum & Bell, and a former managing director at Citigroup and Morgan Stanley, says in BrokeAndBroker:
Fiduciary duties should be imposed only on true investment advisers who are willing to be held to somewhat professional standards. Instead of trying to impose ill-fitting fiduciary duties on brokers, we should force brokers to tell customers the truth about what they do, so that customers can fairly know and be held to the limited remedies they should have against them.
To me that’s the entire issue. There is a difference between brokers and investment advisors, so viva la difference!
The simple fix to Wall Street’s end-around of the Fiduciary Rule, according to Aegis, is the following disclaimer:
Investing is an inherently dangerous activity. You could loss all your savings, all your retirement money, all your kids’ college fund. You could end up broke, eating cat food for the rest of your life. You assume all risks of these things happening. You are dealing with a stockbroker — no matter what we may be calling him or her. Your broker is ONLY responsible for executing trades on your behalf, following the instructions that YOU give him. Your broker does not ever control your account, no matter what you think, unless he executes trades that you did not authorize, and you agree that you absolutely and with no exception accept ALL trades in your account that you do not dispute within at most 90 days after receiving your monthly statement showing those trades. Your broker is NOT a professional investment advisor. Your broker doesn’t know any more about how to invest your money than you, your brother-in-law, your barber or your bartender. Your broker is paid a commission whenever you trade, gets paid whether you make or lose money, and gets paid more with every trade you make. It is in your broker’s interest for you to trade early and often. Your broker might even be paid extra by his firm or someone else for selling you securities that might not be in your best interest. In light of all that, you agree that you will not rely on any trade solicitations, financial advice, investment ideas, suggestions, opinions or gut instincts that your broker gives you, whether you ask him to or not. If you want to be able to hold someone responsible for bad investment advice, you must engage a real investment adviser, registered with the SEC, and preferably a Certified Financial Planner. Otherwise, proceed at your own risk, and don’t be surprised to be reminded someday that a fool and his money are soon parted.
That’s what I’m talking about!
I always say I’m against overregulation, that I’m for prudent regulation. And that means if there’s a short, easy way to say what needs to be said, say it that way.
Aegis’ proposed disclaimer is a perfect example of prudent deregulation.