Originally published on ThinkAdvisor.com, February 10, 2015
By Knut A. Rostad
Last week the Institute for the Fiduciary Standard proposed eleven Best Practices for advisors and brokers who seek to meet the true fiduciary standard. While these Best Practices are crafted to mainly assist investors in evaluating investment and financial professionals on their adherence to fiduciary duties, they also serve a larger purpose.
Best Practices also provide the basis for a new conversation in the public square between fiduciaries and investors—a conversation meaningful to the mailman in Kansas City.
Best Practices strive to be concrete, verifiable and understandable to ordinary investors, attributes not found in many codes of conduct or standards. More often, codes and standards are general and aspirational in nature or incomprehensible or both. Without the aid of legal counsel it can be hard to know what they mean. And it’s easy to get blank stares from investors when you talk codes or standards.
What’s behind these blank stares can be confusion, skepticism or general distrust of financial professionals. It’s not fair, of course, but “fairness” is not the issue. Investors generally see Bernie Madoff when they hear the words “I’m a financial advisor.” The wounds from the financial crisis and its aftermath of billion-dollar bailouts and fines and ongoing reports of unethical and illegal conduct remain fresh.
Paralleling this investor distrust is a ‘new view’ of the fiduciary standard in Washington. While the DOL efforts to modernize ERISA are a praiseworthy exception, a ‘new view’ of fiduciary that is ‘Made in Washington’ is taking hold in many quarters.
In this ‘new view,’ the bedrock and indispensable fiduciary principle of ‘loyalty,’ is, in fact, very expendable. Statements from current and former regulators and policymakers make this abundantly clear: a true fiduciary standard is either unnecessary or, worse still, harmful to investors’ health.
This ‘new view,’ which clearly suggests true fiduciary duties must be largely eliminated to accommodate conflicted sales practices, is profoundly anti-fiduciary and deeply troubling. It questions, at the most fundamental level, the foundation of the life’s work of tens of thousands of fiduciary advisors.
Today’s anti-fiduciary and distrustful climate is different from earlier times when we experienced general swings from more regulation to less regulation or from more trust to less trust of finance. Today’s climate is unprecedented in modern times. We are in uncharted waters.
Even as the stock market hits new highs, investor distrust remains high. How high? Boston University securities law scholar Tamar Frankel says investor distrust today is reminiscent of the 1930s.
To simply say we are in “another” normal cycle really miscalculates today’s different world of finance, advice and investor attitudes.
The proposed Best Practices talk about the importance of fiduciaries having:
A “reasonable basis” for advice
communicating clearly and truthfully
making agreements and disclosures in writing
avoiding conflicts
managing or mitigating unavoidable conflicts
abstaining, in most cases, from principal trading
avoiding third-party payments that impair objectivity or are duplicative compensation
having a baseline of competence, knowledge and experience demonstrated by holding certain designations or advanced degrees
accessing a broad universe of investment vehicles, and
controlling investment expenses.
These are the things that fiduciaries simply do.
The practices underscore what it means to act loyally, in utmost good faith and prudently. They embody values that ordinary investors understand and fervently want their broker or adviser to embrace.
Best Practices provide a basis for a new conversation in the public square between fiduciaries and investors. A conversation that includes why conflicts of interest are so harmful and complete transparency an imperative. A conversation that uses plain English. A conversation that, as a simple matter of fact, clearly distinguishes advice givers from product sellers.
This is a conversation only experienced fiduciaries can lead. This is a conversation, after all, about why their life’s work matters so much to investors. Such as the mailman in Kansas City.
