Originally published on ThinkAdvisor.com, February 16, 2016
By Knut A. Rostad
Last week the 2016 election and fiduciary advice campaigns intersected in different news stories. Donald Trump and Bernie Sanders won major New Hampshire victories; Senator Elizabeth Warren and Congressman Elijah Cummings scolded insurance companies’ contradictions on the DOL conflict of interest rule, and then Wall Street Journal columnist Peggy Noonan scolded both political parties for creating the 2016 political mess.
To be clear, the intersection did not involve candidates uttering the “F” word, or partisan jabs of particular candidates or even election forecasts. It involved voters’ and investors’ loss of trust and confidence in established institutions.
On Tuesday New Hampshire primary returns affirmed what polls suggested (and almost all Washington pundits denied) for months; the clearly historic flavor of voters’ tastes in 2016.
On Wednesday, Senator Warren and Congressman Cummings wrote Labor Secretary Tom Perez with “new information” suggesting many large insurance companies told DOL one thing and then told their investors a totally different story.
Warren and Cummings fingered Jackson National Life Insurance, Lincoln National, Prudential and Transamerica, in particular, for saying the proposed rule could have a “potentially devastating impact” on “hardworking Americans” while then telling investors their firms would do just fine with the DOL rule. Prudential told investors the conglomerate would “come out on the other side advantaged,” after having told DOL it would be “very difficult, if not impossible” to comply with the rule.
The “new information” Warren and Cummings cite are contradictions in the different messages companies send to different audiences at different times. These are contradictions, no doubt. But they are tiny compared to the contradictions embedded in what companies do all the time.
The contradiction when firms say they put customers’ interests first and then vigorously oppose doing so is glaring. As are the contradictions when agents and brokers who exist, and are incentivized, to sell products are called “advisors.” To be clear: representing manufacturers and selling products is wonderful and remunerative and is fine if agents and brokers are held out as such. But it’s not fine if they simultaneously claim representing clients as a fiduciary. Any more than it is fine for an attorney to represent both parties in a divorce.
The parallel world of election 2016 – a world riveted by voter distrust – is relevant. Journal columnist Noonan dissected the 2016 campaign and New Hampshire vote last week. Her takeaway: the rise of Trump and Sanders is a failure of “the political class” and “15 years of failed presidencies.” She writes “Congratulations to the establishments of both parties …. The authors of the rebellion.”
On Trump, Noonan is a contrarian. She rejects convention about his supporters, “the GOP is succumbing to nativism, nationalism … and celebrity,” and instead points out that voters had eight months to take his measure (vulgarities, middle school taunts included) and gave him a huge New Hampshire victory.
About his future, Noonan again rejects the conventional: “Is Trump too moderate?” Instead, she says “two big questions” will matter to voters. One, “Is he at all a good man?” and two,”Is he fully stable?” Noonan writes, “America doesn’t deliberately elect people it thinks are base, not to mention crazy.”
It has been one year (as of February 23) since the president launched the campaign for the DOL to update ERISA.
The campaign succeeded. The rule is expected to be out in 60 days. Throughout the process, the messaging of rule opponents has been consistent and clear. It’s also been, on its face, extreme in a basic sense. It is not believable, since it contradicts laws both natural and philosophical. The underlying message that ‘Conflicted advice helps and fiduciary advice harms investors’ turns law and history and logic and experience on its head.
This extreme message prompts questions – from the ethical to the practical. To start, what does it say when such an argument becomes the visible centerpiece of an industry? More practically, did the argument and “going negative” on fiduciary duties work? Alternatively, would accepting fiduciary duties and cooperating with DOL and driving transformation – all very publicly – have worked better?
Trump and Sanders may be derailed at any time. Still, their campaigns are historic and will continue to change the political world. Per historic norm, the leap from politics to finance is a small step. The backdrop of the pain from the financial crisis, publicized cases of bad behavior from financial firms and Depression-era levels of investor distrust are eerily familiar factors.
These factors have pulled retail investors away from established brokerage firms and to fiduciary advisors, independent BDs and robos, to indexes and ETFs, or old-fashioned bank accounts. New offerings from the industry’s largest players are increasingly taking center stage.
The Trump-Sanders campaigns are loud, boisterous and relevant to the quiet and somber world of finance and financial advisors. Relevance perhaps best expressed in the first question Noonan says voters must answer “Yes” before electing Trump president, “Is he at all a good man?”