All men, who after all are all just overgrown 12 year olds, admire Johnny Depp to some degree – a grown man who becomes fabulously wealthy by playing pirate??? Sign me up! But what’s not to emulate, as this article in the New York Times points out, is his sheer malfeasance in handling his own finances. Depp is now involved in litigation with his management company over who is responsible for the financial disaster he finds himself in, and it looks clear that there is more than enough blame to go around for all parties involved.
But the reason I write about this is not for the opportunity to link to this, but rather because the author of the article, Charles Duhigg, uses Depp’s situation as a frame of reference for considering the appropriateness of the Department of Labor’s new fiduciary regulations. Of course, Depp and his problems don’t implicate the rule itself, but they do illustrate the question of how much responsibility should be imposed on financial advisors to act in their clients’ best interest and how much responsibility should instead be placed on investors to – when it comes to their advisors’ advice – “trust but verify” (which is always a good rule in life, and one I have lived by since the Reagan era). As the author of the article suggests, the new fiduciary regulations can be understood as an attempt to recalibrate where the line should be drawn on the continuum between an advisor’s responsibility to protect his client, on the one end, and the client’s responsibility to protect himself on the other. The new fiduciary regulation moves that dividing line closer to the advisor’s end of the scale, making the advisor a fiduciary of the client’s needs when it comes to investing.
The author suggests that Depp’s extreme lack of attention to his own finances suggests that there are limits on the extent to which the obligation of protecting a client against bad investment decisions should be imposed on financial advisors. However, when it comes to the Department of Labor’s new fiduciary rules, there is something important that the article’s author leaves out of the equation, which is the sheer difficulty of understanding the expenses and risks of investment products offered to clients by their advisors. I litigate disputes over retirement plan holdings all the time, and I can tell you, that information is not always readily available to advisors’ clients, their clients often don’t even know to ask for it or if so, what to ask for, and they often cannot understand the information provided to them. That information and knowledge gap between financial advisors on the one side and their customers on the other cannot be ignored in considering how much obligation to protect customers – including, if need be, taking on the status of a fiduciary – should be assigned by regulation to financial advisors.