Good Intentions, Lousy Execution

The Department of Labor’s projected fiduciary policy has the intention to 

help smaller investors save and get professional help. But the DOL’s staff 

didn’t do their homework.

Everyone in the financial industry believes we need to put the needs of our 

clients ahead of our own interests. Besides the ethical reasons, we know 

that when you treat clients well, they make referrals and stay with you.

For those that violate this ethic, we have are monitored and regulated by

FINRA, the SEC and the states. 

Recently I went to Washington DC to speak with my US Senator and two 

members of Congress-a liberal black Democratic and a conservative 

Republican. Both did their homework. Their conclusion was that the DOL 

policy was wrong headed. 

I asked the Senator I met with to request answers from the DOL to 

questions which follows this essay.

DOL’s approach will harm small investors who most need professional help. 

It will make it legally risky to deal with small accounts unless they pay a fee, 

rather than commissions. Clients will pay more and get less.

The “fiduciary standard” would mean that firms could no longer sell bonds 

from their own inventory or preferred stock as IPO’s. For bonds, this will 

likely increase spreads by several points since the volume for fixed income

volume will shrink. This will happen in the preferred stock IPO market

where the issuer, not the client, pays the fees. Fiduciary standards forbid

IPO’s.

My point of view is from 40 years in the industry. My partner- an 18 year 

veteran- and I manage some $600 million in assets. Barron’s named me as 

one of the 1200 top US brokers in 2014 and 2015. 
Do we only work with the rich? No, we have over 183 clients who have less

than $25,000 in IRA’s; 109 of those folks have not paid us commissions in 

the last 12 months. Before taking an order for a new client with young 

children, we insure they have a will or guardianship letter and term life 

insurance.

The DOL’s rules for “allowing” commissions requires a yearly contract, 

written justification(s) on buys & sells, and piles of unneeded paperwork. 

This leaves advisors open to law suits and reduces our ability to serve large 

numbers of clients. Frankly, some of my best sell calls were instinctive.

The DOL takes away a client’s freedom of choice, limits what can be 

invested, and how a trade will be paid for. If a client holds long term, why is 

a yearly fee suitable? If a client wants concentrated positions or cash, the 

“fiduciary standard” does not allow it. 

Our commissions often are far less than fee based accounts. Why must the 

client pay more and be limited on what he or she can do!

Many investors do not have the inclination, skills or time to make 

investment decisions. They need guidance, not only for investments, but 

for budgets, how to help an ailing parent, a child’s education, the buying of 

a home, and the protection of their children. We charge only for 

investments but our other advice is valuable. 

To make it perfectly clear, this poorly thought out DOL policy will make me

more money. Lots of it! We should thank the DOL. But the policy is plain 

wrong. It harms the rich and the poor. My opposition to this explains why I 

traveled to DC on my own dime to speak to my representatives.

I am not an opponent of President Obama. I supported him with donations, 

and door to door campaigning. But the DOL’s policy on fiduciary standards 

illustrates how good intentions without an understanding of how an 

industry operates will lead to unintentional consequences. 
Bob Chernow is a Milwaukee businessman, the form Vice Chair of the 

World Future Society and the CEO of The Tellier Foundation, as well as 

chairing several large public commissions. His opinions are his own. 

1. Fixed Income, especially corporate bonds and preferred stock, but including mortgage backed 

bonds and pass- through securities, government securities and taxable muni bonds have 

markets created by individual market makers. Under the “fiduciary” rules, clients cannot buy 

from the inventory created by the firm they are using.

What will be the incentive for firms to risk their capital to make markets in fixed income? 

Will spreads on bonds of 3 to 4 points occur (as they did in the 2008 crash when market makers 

went out of business or had less capital to risk?) There is already much discussion about the lack 

of liquidity in the fixed income markets due to some of the Dodd Frank rules being 

implemented.

2. Clients ask advice from their brokers but often keep large amounts of capital liquid. The 

Fiduciary standards require that clients be “fully invested”, that is with only 10 to 12% in cash. 

Will this standard be changed?

3. Other clients want to use passive investments strategies such as laddered bonds. Should they be 

charged a yearly fee that presents no value to them?

4. Many clients are not paying a yearly fee (or any commissions) because their investment is good 

or because they can exchange at no cost within their family of mutual funds. Why should they 

pay a yearly fee?

5. Many large accounts pay very low commissions. How will the DOL handle those accounts being 

shifted into fee based accounts where their fees might four fold?

6. How does the DOL plan to monitor exempt accounts where some trades are solicited and others 

are not?

7. Exchange Traded Funds (ETF)’s and index funds increase volatility by matching massive buys and 

sells. We saw what this can do with volatility when the Dow Jones Industrial plummeted 1000 

points. If the DOL forces investors into these types of funds, will volatility be increased?

8. Some investors believe that individual stock choices with small companies are excellent 

investments, yet these companies are not usually found in indexes or most mutual funds. Why 

should clients be excluded from investing with these companies?

9. How is the question of freedom to choose by client investors being addressed? Will the 

government be regulating fees, commissions, what investments can be bought or sold?

10. Some investors use annuities in their retirement accounts. How will the DOL address the use of 

these vehicles? (Note: many variable annuities guarantee a return on investments if annuitized.)
11. Has the DOL calculated the increase of cost to the public with the use of fee, rather than 

commission business?

12. With fee business, an investment professional needs to make or change investments to justify 

the fee. Has the DOL considered that this will lead to unnecessary transactions instead of long 

term investing?

Bob Chernow

2020 Lake Shore Road

Grafton, WI 53024

262-421-8218

bchernow@wi.rr.com