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246 Goose Ln, Ste 201 Guilford, CT | 83 Halls Rd, Ste 205 Old Lyme CT

2nd Quarter 2018

Fiduciary Rule

Follow the money – All the President’s Men, 1974

The quote above was attributed to Mark Felt, former associate director of the FBI and secret informant of Bob Woodward, when he broke the story of the Watergate break in for the Washington Post. Although Felt never actually said this, the phrase alludes to the idea that the trail of money will guide you through the lies and deceptions to the truth.

Money and the Fiduciary Rule

One of the expected events of the second quarter was the vacating of the Department of Labor’s (DOL) Fiduciary Rule by the 5th US Circuit Court of Appeals. Between the time that the Rule was approved in late 2016 and when it was supposed to go into effect, the insurance industry and brokerage industry spent an enormous sum in lobbying money. Arguing that it would be bad for small investors, they sought to first modify and then kill the Rule.
Although several lawmakers in Congress spent considerable effort to remove the Rule, representative Ann Wagner (MO 2nd District) threatened to kill the DOL rule in its entirety from the start. Like many others, she favors new guidance from the SEC at a future date. Any guidance from the SEC is expected to be a watered-down version of a fiduciary standard that might further confuse investors. Additionally, the SEC cannot enforce its standards and protect all investors as it lacks authority over insurance products, such as variable annuities, which are used extensively in retirement accounts. The DOL’s Fiduciary Rule, despite only covering retirement accounts, would have applied to most of the savings of small and medium investors and would have applied to any insurance products sold in these types of accounts.
Representative Wagner’s required congressional disclosures highlight her ties to the industry that has staunchly opposed the rule. Her largest single source of donations during the 2016 election cycle was the brokerage firm Edward Jones. She also accepted large donations from Wells Fargo Advisors, Scottrade and Stifel. These firms are all headquartered in or near her district around St. Louis. Wagner raised more than $780,000 from finance, insurance and real estate firms, according to the Center for Responsive Politics. According to Money, that placed her 28th out of 435 House members in donations from that sector. She ranked only 258th by seniority.
As an aside, the Securities and Exchange Commission (SEC) was created in the 1930s and with the 1933 and 1934 Act, created regulation for brokers and dealers, who sell securities for a commission or out of their own inventory. With the 1940 Act, they set up the regulations to oversee investment advisors, who provide advice for a fee. Investment advisors have always been held to a higher legal standard of care, known as a fiduciary standard, requiring them to act in their client’s best interest. Broker-dealers, despite trying to blur the distinction by using terms such as “financial advisors” and “wealth managers,” have not been held to this standard because they are focused on sales, not advice.
We thank you very much for the trust you have placed in our firm. Please do not hesitate to contact us with any questions. Further, if your financial circumstances have changed, please call the office to set up an appointment to review your plan.
Best regards,
Shoreline Financial Advisors, LLC