The fiduciary rule is a friend of capitalism

By Charles Fried

PABLO MARTINEZ MONSIVAIS/AP

President Donald Trump sits at his desk after a meeting with Intel CEO Brian Krzanich, left, and members of his staff in the Oval Office of the White House. Trump is acting quickly to dismantle a web of regulations the government passed after the 2008 financial crisis to tighten oversight of banks and protect consumers and taxpayers.

BACK WHEN ELIZABETH Warren was inveighing against sleazy mortgage brokers who were selling mortgages with low rates to unqualified home buyers — mortgages that would balloon to the unaffordable long after the brokers had collected their commissions — she was called out by one miscreant, who asked her if she believed in capitalism. 

Representatives of big banks and brokerages — not to mention members of Congress — are repeating this line of questioning in defending capitalism against the Department of Labor’s fiduciary rule, which they would like to repeal.

The standard Marxist line on capitalism is that it is a sordid scene where the powerful, shrewd, and ruthless enrich themselves by systematically exploiting and immiserating their fellows. And that explanation does come close to describing the crony capitalist kleptocracies that blight many potentially prosperous but miserable nations. But that is not the true face of capitalism.

Capitalism at its best is a festival of liberty and human connectedness. Capitalism is simply the system of markets taken sometimes to great lengths of complexity and abstraction. But markets are the foundation. Markets are the locus where free men and women bring their talents — and sometimes luck — and exchange them to satisfy the needs and wishes of others, as they satisfy their own.

But dig deeper, and underneath markets you have the human value of trust. Trust is what brings people to market, believing that a beneficial exchange may take place.

The contrasting Marxist and capitalist visions of human cooperation can be symbolized in two metaphors. In one, a Roman trireme, an overseer beats a drum, a master wields a whip, and the rowers work in an enforced harmonic rhythm. In the other, a college crew of eight finds swift passage through the water only because of instinctual, fraternal coordination of effort, goal, and understanding. Even in the trireme there must be some common ground of understanding. That is why, when God wished to stop the Babylonians for their presumptuous effort to build a tower to reach the heavens, he simply caused them to speak in different languages. Without a common language, they could no longer cooperate.

Enter the fiduciary rule. It would require stockbrokers and insurance marketers to act as fiduciaries. All that means is that they must act in the best interests of their clients. Financial products are often complex and risky and clients need to know that their stockbrokers have their backs.

Well, one may respond, customers should simply be wary, and demand assurances. True, but the professionals thrive on creating an atmosphere of confidence, sometimes playing on long-term relationships, ethnic or professional affinities, or soothing rhetoric. In fact, they thrive by creating the impression that they are acting in the best interests of their clients; they ask for trust.

That is where the images of the trireme and college crew of eight come in. Financial markets, like other markets, rest on a foundation of trust, on truth stated or implied. What then is so threatening in a law insisting that these salespersons, and the institutions that set them loose on an unsuspecting public, be held to the trustworthiness they insinuate but are unwilling to underwrite? To excuse that and celebrate the abuse of a trust that is invited in every soothing seller’s words is to celebrate not capitalism but the cynicism and hurt that undermines it. All true friends of capitalism should support the fiduciary rule.

Charles Fried teaches at Harvard Law School and, from 1985 to 1989, was solicitor general of the United States. His Harvard-X MOOC is “From Trust to Promise to Contract.”

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