I figured I was going to hell because disgust would not have been my reaction. I was a normal 16-year-old boy with raging hormones and my Sunday school teacher was explaining the story of Joseph and his master’s wife. For those of you who do not know the story, Joseph was a Hebrew slave in ancient Egypt who, because of his skill, was put in charge of all the financial affairs of his master’s household. The plot of our little 1900 B.C. soap opera revolves around the good-looking wife of the master attempting to seduce the handsome young slave. He persistently rebuffed her advances, but she would not give up. Finally, on a day when the house was empty, she grabbed Joseph by the cloak and ripped it off. His response was to run. My hell-fire and brimstone Sunday school teacher explained that Joseph ran because of his disgust for what she desired. I was only appalled because – while I knew it was wrong – I would have found her appeal appealing. Years later, a friend explained that Joseph ran because it is easier to avoid temptation than it is to resist it, which made more sense and eased my concern about myself.
I bring up this story because it is a perfect allegory for the new Department of Labor (DOL) fiduciary rule. Before this rule, there were two standards for individuals giving advice on retirement plans – the fiduciary standard for registered investment advisors and the suitability standard for insurance agents and stockbrokers. Under the fiduciary standard an advisor had an absolute duty of loyalty to a client. It wasn’t all that much different from Joseph’s duty to his master, except an advisor got paid a reasonable fee. However, the suitability standard was less stringent. Conflicts and self-interest were permitted. So, higher costs and higher commissioned alternatives could be recommended as long as the investment product was appropriate for the client’s risk tolerance. If this lesser standard were applied to Joseph, messing with the master’s missus could have been justified as long as it didn’t get out of hand.
Unfortunately, the messing around with fees charged to retirement plans too often did get out of hand. So, according to a WealthManagement article by Elliot Weissbluth, the DOL decided to impose the fiduciary standard on any person paid to give advice to retirement plans. “Well… sorta.” While the new standard applies evenly to advisors as well as brokers and insurance agents, it is in his words “watered-down.” He, along with a significant segment of fiduciary advocates, believes the DOL made too many “…concessions to those who stood to lose money by fully adopting the idea that the client’s interests must come first.” Ron Rhoades, in FiduciaryNews.com, explained that, in essence, the DOL moved the fiduciary standard from “sole interest” to “best interest.”
The difference between the two is that sole interest requires the avoidance of any conflicts of interests whereas best interests allows conflicts, provided a certain set of criteria are met. As John H. Langbein explained in the Yale Law Journal, sole interest recognizes the danger that a fiduciary “…placed under temptation will allow selfishness to prevail…” and best interest recognizes “…a central truth: Conflicts of interest are endemic in human affairs, and they are not inevitably harmful.” So, if avoidance is the preference and the criteria for the allowable conflicts are “…properly applied, the best interest standard is not that far removed from the tough sole interest standard…,” says Rhoades. However, “…applied incorrectly, substantial harm can result.”
And, therein lies the rub: the DOL’s allowable conflicts — referred to as the Best Interests Contract Exemption — must be strictly interpreted and applied for the new rule to work. Because Joseph knew what Oscar Wilde quipped, “I can resist everything except temptation.” When the standard shifts from avoidance to rule-based resistance, the temptation is to push the limits of allowable actions by quibbling over the definition of sex or the meaning of best interest. If that happens, then the fiduciary standard would go to hell in a handbasket and that really would be disgusting.