John Lefferts' Blog

Tuesday, April 28, 2015

Fiduciary Progress: A luxury once tasted becomes a necessity?

This past weekend I was driving with my wife and son as we passed a gas station. I couldn’t help but notice them gawking at the price per gallon posted on the moniker. Then they both complained about prices edging up again and how it’s going to eat into their monthly budget. I didn’t say anything but had a tough time hiding my smirk as we drove on past in the Tesla. I haven’t set foot in a gas station since getting the Tesla late last year. But then I realized that I pay the gas bills anyway…smirk goes to frown. There is one thing I can tell you; once it comes time to replace the next family car, it may or may not be a Tesla, but it will be an electric car. Yes, a luxury once tasted becomes a necessity.
The same holds true for much of the progress we are experiencing today with technological advancements. In my hood, each home has substantial solar panels either on the roof or at the side of the home. You would think our electric bills in California would be higher than Texas where I lived last year. Not so. With the solar panels, our bills are 1/3rd of the price…and that’s before the A/C over summer is figured in. Again, I won’t have a home without solar having tasted it. Also in Texas, I spent more than I’m willing to admit on a whole home system wired with one of the best sound systems at the time. Now in the new home, we cut the wires with a new wireless Sonos system with far better quality at a fraction of the cost spent in the old home.  And I’ve got a garage closet with several blue-ray players that a couple short years ago were state of the art. Now they’re obsolete. Just today I saw news about the Tesla battery initiative to power a home potentially cutting the utility cords. In a few short years, it’s possible that like the car, solar and sound systems (and Robo Advisors?) this too may become the norm. And once we get there, we’re not going back. It becomes a necessity once you have it.
Progress happens which is usually a good thing. But when I look to the Financial Services industry tusseling over new regulations and the “fiduciary argument”, it becomes clear that much of the business continues to fight progress. So far, that deferral of progress has worked. Dated business models are spending big bucks to hold on to the old way of doing business. The consumer wasn’t indifferent about whether their advisor was acting in their best interests, they simply didn’t know it was possible that they weren’t. I sense this is changing. With social media and the issue being taken up by credible pubs like the Wall Street Journal and New York Times, there seems to be a shift in the tide from indifference to “hey, this is not right, it’s gotta change”. I also think the large wires and IBD’s see this as well as we’re hearing somewhat of an acquiescence to the need for a uniform fiduciary standard. Yes, we’re entering that territory where the possibility of a uniform fiduciary standard is now being tasted and there may be no going back.
The lobby against the uniform standard is not without basis. The legal exposure by opening up lawsuits is HUGE. Aside from “Wildlife of Texas” selling 12% commission indexed annuities, I believe all financial services firms want to offer products and advise on what is in their clients best interests. But just as you see ads from law firms trolling “If you’ve been exposed to asbestos, call Dewy, Cheatem and Howe”, how about, “If you’ve been charged over 1% by your financial advisor, you may have recourse...” Most larger firms can adjust to a fiduciary standard since it covers the majority of business they’re already doing anyway. I think that’s why Merrill, LPL, Wells Fargo and a few other big firms have been on record as being supportive of it. But the legal exposure issue will keep much of the industry in the fight.
Conversely, it may also be fought from the other side. Harmonization of regulations has yin-yang thing. Yes, we’ll all be held to a fiduciary standard (RIA’s Cheer good for us! Brokers/Agents boo, bad for us). But it also implies that we’ll all have the same oversight by a 3rd party…likely FINRA in some form. (RIA’s boo, bad for us! Brokers/Agents knowingly smirk). I really don’t think we get one change (uniform fiduciary standard) without the other (uniform FINRA oversight). The "fee only’s" think brokers should be held to their standard, but they themselves should not be held to the same level of accountability just as some brokers think they can hold themselves out as "advisors" but not be held to the fiduciary standard. I'm afraid we can't have it both ways. Yin-Yang.
Progress is not always a clean positive linear process. It involves change which is always difficult. Which brings me to back to the luxury becomes a necessity thing. Coming from Texas where a spring storm could dump up to 10 inches of water in a matter of hours, now in California…it's one of the greatest of all luxuries in a state full of them. I’ve come to realize that luxuries and necessities are a matter of perspective.   
We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.” -Abraham Lincoln