Missing in Election: Policy Debate

Apparently no one cares about policy, just mood.

You can just skip this post.   I make the point that no one apparently cares about policy and then I go ahead and write about the merits of a policy requiring advisors to adopt a "fiduciary standard" versus a "suitability standard."

The rule affects your life, but you probably don't care.   And don't expect to hear about it on the campaign, because it is important but complicated and people don't have the patience for complications.

There is a difference between Hillary and Bernie, but you would barely know it from their speeches.    They attack each other now, but it is over tiny points of policy and which of them adopted the same policies earlier. (Bernie first on trade protection, Hillary first on black grievance, Bernie for $15 minimum wage, Hillary for getting to $15 minimum wage.)  But the tone is different (Bernie is revolution, Hillary is grind-it-out) and Bernie says the whole system is corrupt and must be ended while Hillary says that she can operate for progressive good in a corrupt system and will work to cleanse it.

Yes, there is a difference, but mostly of personality and background, not policy.

On the Republican side Cruz, Trump, and Rubio all have essentially the same position on immigration, but they argue over language and tone.  Trump sneers a little at Mexicans while saying he loves them, while Cruz and Rubio simply want to lock them up and deport them while dividing families, but with a bit more emphasis on rule of law, not native born American pride. 

Here too, there is a difference, but mostly of personality and background, not policy.

Progressive media denounces Wall Street slime

There is a policy debate on a matter close to my former professional life--the application of a fiduciary rule for IRA, 401k and other retirement accounts--about which I have heard exactly zero--nothing whatsoever--from any candidate.   I am confident I know who will support what, based on party team loyalty, but there will be little or no discussion of the merits.   Elizabeth Warren has pushed an idea in consumer protection, requiring financial advisors and their firms to adopt a fiduciary policy rather than a suitability policy in investments in ERISA (i.e. retirement type accounts like IRAs.)

Most news articles I have read about this take the point of view that Financial Advisors are predators intentionally fleecing clients with dishonest, self-interested recommendations.  And Elizabeth Warren has enormous respect among Democrats leads the effort for the change.   Bernie and Hillary support the bill.   Republican Cruz will oppose it.   As Greg Valliere, a global strategist for Horizon Investments put it, “I think it's a pretty safe assumption that Cruz opposes the fiduciary rule and that Trump has never heard of it.”   The opposition will be based on big-picture thinking: regulations are bad, Elizabeth Warren is pro-regulation, the bill is bad.   Syllogism.

I don't doubt that some investors have investments that are less than optimal, especially when seen in hindsight, and they likely were steered toward them by advisors.   I don't doubt there are horror stories.   Perhaps a law requiring a formal fiduciary standard is on balance OK.   My own feeling, based on my own former practice, was that the existing system, in which the Advisor was required to steer clients toward investments that made sense for them and which were suitable for their situation worked perfectly well.  

Hillary's only possible position

What is the difference between suitable vs. fiduciary standard?  In my practice, not much, except that in a "suitability" standard a client could exercise some personal eccentricity, telling me they love local car dealer Lithia Motors but hated Nike because Nike Chairman Phil Knight is a Duck fan, not a Beaver fan.  So they could have account investments that were somewhat idiosyncratic.  They could own gold.  They could exercise a preference for or against oil stocks. 

They could hold cash in a Morgan Stanley branded money market fund rather than an essentially identical "outside" money market fund.   In a fiduciary account one cannot self-deal, i.e. put investors into an in-house investment, only outside investments.  Since fiduciaries are prohibited from apparent conflicts of interests, and getting paid to do a transaction is a conflict of interest, there will be a strong tendency to require people to have fee-based accounts.  Typically investors pay about 1% of total assets per year for all-inclusive supervision and transactions, therefore there is no incentive to trade or not trade, which lack of incentive is supposedly in the interest of a client.   

Some clients want gold.  Are they prudent or crazy?

Gold!  Gold!

Some clients--especially people who follow conservative media--want to have gold or silver in their portfolios, typically in amounts that reflect how thoroughly they listen to Glenn Beck or other conservative shows predicting disaster.  They might be right someday.  Or not.

The practical result is that all clients will be forced into a "reasonable" portfolio based on supposed "best practice."   Clients lose flexibility.   Clients are required to get "what is good for them" as opposed to "what the client wants."   It will generally increase costs for consumers as it shoehorns them into packages that reflect lawyers' notion of what is legally unassailable rather than investors' notion of what they want, and that is particularly true for clients who want to "buy-and-hold".

The odd irony is that a bill posited as "consumer protection" and a law sold as reigning in bad financial advisors will tend to increase costs for my former clients and will require them to have paid me rather more than I previously earned.   I was OK earning less and was OK attempting to meet clients' sometimes quirky desires, which meant more work.   This little bit of "consumer protection" to "reign in" Advisors would have made my life easier and made me more money.   What an irony.

Debating the key issues

No boring policy talk

The policy debate on whether the new "Consumer Protection" bill is made law will be essentially un-debated.  It will rise or fall on whether the  Democratic candidate wants to appear to be pro consumer versus pro Wall Street (YES!), and it will rise or fall on whether the Republican candidate wants to appear to be a compromiser with the devil in the form of Elizabeth Warren (NO!) or wants to be pro-business and anti-regulation (YES!).  

Horse race report

Will there actually be policy debate laid before the public?  No.  It is complicated and boring and hard to do in a TV panel yelling back and forth abut Trump electability.

I am retired from financial advising, but I still care a lot about my now-former clients.   The new law will not hurt them badly and my successors will work with it to minimize its costs to them.   But it will inevitably reduce their retirement investment options, by law.  How it actually affects retirement savings will be played out in the details of the law.   Given the nature of my former practice the changes will be small and manageable.   But it will neither protect them or reduce their costs.

We have 24/7 political news coverage, but there will be no time or interest in the law.   It will be debated in the most broad terms, "Consumer" versus "Wall Street."   Any candidate who attempts to look closely at the actual law and policy would be pilloried for being "soft" in defending their team, so it has not happened yet and I expect will not happen ever.   Can you picture what would happen to poor Hillary if she were to express some of the reservations I mention here?   "Pawn of Wall Street!".   Could you imagine Cruz citing some investment horror stories and saying regulations might do some good?  Headlines:  "Donors abandon Cruz."


I cite a sampler of CNN panels not simply to complain about the lack of debate but also to re-affirm my bigger point: politics in America plays out not through a debate on policy but through body language and tone and the gut impressions of voters on which candidates are strong, are representative of them, will understand and defend their interests.