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LETTER FROM THE EDITOR

You Keep Saying 'Honesty'…

“Isn’t honesty the best policy?”
How can you say no to that? Of course you can’t. That is the power of the Department of Labor’s public relations campaign to support its “conflict of interest” rule.
 
The honesty question is the headline for an op-ed article by Rep. Tammy Duckworth, D-Ill., published in The New York Times on June 10.
 
The phrasing has been the bludgeon wielded by the DOL and the fiduciary-only crowd since the beginning of their campaign. It’s a variant of the “what’s so hard to understand about putting your customers first?” line that so effectively shuts down an examination of the actual facts.
 
So, in the pursuit of honesty and truth, let’s take a look at Duckworth’s argument and the reasoning that is supposed to support it.
 
The op-ed focused on a case brought by Russell and Christine Kazda, who are Duckworth’s constituents in Illinois. It so happens that the Kazdas also were featured in a New York Times article on April 8, under the headline, “‘Customers First’ to Become the Law in Retirement Investing.”
 
The difference between the two Times articles is that Duckworth’s is an opinion piece and the second is ostensibly an objective news story from a Times reporter.
 
This is the case background in the news article:
 
Their advisors took $172,000 of the Kazdas’ IRA savings and put it in illiquid real estate investment trusts and later invested money in an options strategy. They ended up losing about $125,000, which prompted the Kazdas to sue the advisors.
 
“I could have had my fourth graders do it and they would’ve done a better job,” Mrs. Kazda said.
 
Andrew Stoltmann, a securities lawyer in Chicago who represented the Kazdas, applauded the changes.
 
“By imposing a fiduciary duty standard, this will cause the brokerage firms to self-police,” he said, protecting most people from often unsuitable investments like “nontraded REITs, variable annuities in IRAs and active trading of stocks and options.”
 
On the surface, this seems a case where these folks — he a retired mechanic and she an elementary school teacher — were victimized by some cowboys untethered from the best interests of their clients. 
 
Neither of the Times items named the sellers, but Kazdas’ attorney identified the two advisors on his firm’s website in an appeal to get more complaints against them. It is this kind of compiling that can lead to a class action.
 
Both of those advisors were registered investment advisor representatives subject to the fiduciary standard at the time of the alleged infractions, according to FINRA. 
 
Let’s be crystal clear here: These advisors who are held up as examples of the rogue behavior that the fiduciary standard would stop are already subject to the fiduciary standard.
 
So, what would the DOL’s rule do in this case? Nothing. What will the rule do? It just might extinguish a whole class of Main Street advisors, by the Times article’s own reckoning:
 
The so-called conflict-of-interest rule covers only tax-advantaged retirement accounts and does not apply to most other investments. But it could lead to more sweeping changes across the financial services industry, making it harder for some smaller firms to do business and perhaps encouraging a further consolidation into larger companies better able to handle the detailed rules of compliance.
 
What other reasoning does the Times reporter use? 
 
The Obama administration, relying on extensive academic research, estimated that conflicts of interest embedded in the way many investment professionals do business cost Americans about $17 billion a year, leading to annual returns that are about 1 percentage point lower.
To see just how questionable the underlying foundation is to the administration’s case and how far an overreach that $17 billion represents, visit bit.ly/dol-flaw-report and read the association’s point-by-point critique. Even the most objective reading of that report would cast some doubt on the “extensive academic research.”
 
Looking back at Duckworth’s op-ed article, she concluded that “The fiduciary rule would stop the hawking of substandard investment products. It is better both for the consumers it protects from untrustworthy financial advisors and for the financial industry as a whole.”
 
It is clear that imposing the rule would not substantially increase consumer protection, because it did not in the very case she cited. Also, she fails to note that the most egregious cases of financial fraud, such as Bernard Madoff’s $65 billion Ponzi scheme, were conducted under the Securities and Exchange Commission’s watch.
 
Who actually benefits the most from the new rule? Lawyers certainly do. They have a whole new class to go after under the rule’s best interest contract exemption. 
 
The Times identified Duckworth as a congresswoman but failed to mention that she is also running for the U.S. Senate.
 
And who is Duckworth’s largest group of contributors? Lawyers and law firms, according to the Center for Responsive Politics. The No. 2 individual contributor ($108,500) is Simmons Hanly Conroy, which bills itself as the Mesothelioma & Asbestos Law Firm.
 
This is just one example of a campaign that uses shaming language to prop up fairly weak arguments — once you actually read that data and follow the links. We know what not telling the whole truth is, so we have to ask:
“Isn’t honesty the best policy?”

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. Steve may be reached at [email protected] [email protected].


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