The Fiduciary Rule and the Evolution of Financial Advice

Recent regulatory changes abroad and here in the U.S. will likely prove to be a boon for the ETF market—and a shift in how financial advice is delivered. The European Union’s MiFID II (Markets in Financial Instrument’s Directive) and the U.S.’s adopted Fiduciary Standard both suggest disappointing outcomes for actively managed mutual funds, mostly due to costs. Don’t worry if you haven’t seen MiFID I yet—MiFID II is still enjoyable.

Essentially, the EU rule will force additional transparency in commission-based advisory models. Likewise, the Fiduciary Rule forces financial advisors to act in their clients’ best interest, fundamentally changing the landscape of financial advice. The difficult part of that directive is determining what truly constitutes “best interest.”

The idea is that by being transparent, investors will realize they are paying too much and move their money to an ETF. Or that financial advisors will view investing in ETFs as sufficient to fulfill fiduciary obligations without providing genuinely sound financial advice. However, transparency does not necessarily equate to acting in one’s best interest. Sure, it’s important—but it might not be the most important.

Providing bad financial advice at a low cost is still bad advice. If I take my car to a mechanic because my transmission is failing and he works on my air conditioning instead, he doesn’t get a pass just because he didn’t charge me more.

Google Buys Apple

A few days ago, the Dow Jones Newswire published some fake news that Google would be buying Apple. The result was a small (read, 1%) run-up on Apple stock that quickly faded, as well as a retraction and apology from Dow Jones. They had a technical error.

I don’t really like any part of this. Some kind of computer over at Dow Jones has the ability to post news to the public feed, and some computers elsewhere have the ability to purchase stocks based on that news. The second part is especially troubling. One of the posted headlines read, “Google to buy Apple for $9 billion.” This is problematic because Apple’s market cap is over $800 billion. Whatever computer thought a $9 billion sale equated to an Apple buy should probably be fired, or decommissioned, or at least given a stern talking to.

This incident reinforces the need for human oversight in financial advice and investment decisions. Algorithms can be fast—but they aren’t always smart.

Amazon as Lender

Did you know Amazon gives loans? The online retailer has been making loans to merchants since 2011 and originated $1 billion in loans in the past 12 months.

This has led some to speculate about the firm’s longer-term banking aspirations. With the declining growth of commercial banks, regulators are starting to consider nontraditional players.

Certainly, there has been some disruption in traditional financial markets by tech companies like Lending Tree. But one major factor in the decline of retail banks is regulation. It’s worth asking how “too big to fail” might apply here. As a bank, Amazon isn’t too big to fail. But as an online retail giant? That might be a different story. I’m kidding (sort of), but the broader issue is clear: If the regulatory environment becomes so unfriendly that long-standing banks decide to close, it may discourage innovation and new entrants offering responsible financial advice through alternative channels.

Elsewhere,

• Why don’t retirees wait until 70 for social security?
• Domino’s makes senior secured debt new again,
• Everyone benefits under Trump’s Tax Reform,
• Pay attention to this!
• Uber’s reckoning,
• How to receive feedback,
• Van driver stopped for carrying excessive amount of cheese,
• A decade of stock charts,
• and The failed 401(k) experiment.

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