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Blogs - Sounding Off
Sounding Off: Fidelity's Attack on Fiduciary Standard 'Unsupported, Ill-Conceived'
Friday, April 12, 2013
Partner Insights

On Wednesday, Ronald O'Hanley, Fidelity's president of asset management and corporate services urged congressional action to stave off what he described as "a looming retirement crisis," appealing to lawmakers to pressure the Department of Labor to avoid an expansive redefinition of fiduciary responsibilities for advisors.

Ron Rhoades of ScholarFi Inc. in Alfred, N.Y. and the former incoming chair of NAPFA, said O'Hanley's arguments "lack substance and ring hollow" and submitted the following response.

Rhoades concluded: "The only thing that is limited by the fiduciary standard is the greed of Wall Street."

Give it a read and we encourage you to respond below with your thoughts on the pontential ramifications of the fiduciary standard.

Wall Street is unleashing its attack dogs to try to stop the EBSA from re-releasing its proposed rule, "Definition of Fiduciary." Wall Street's lobbyists are out storming the Administration, and particularly the Office of Management and Budget (through which the rule must first pass, before it is released). And Wall Street, with its millions of millions of campaign contributions, is seeking support from Congress as well.

In an April 10, Financial Planning article the author quoted Fidelity's Ronald O'Hanley as stating: "The effect of this rule was clear: It would have shifted the legal line between investment advice and education, and thus dramatically curtail the valuable education and guidance investors receive today. The real outcome of this misguided proposal would be no education and no guidance for average and low-income Americans. They are the ones that are going to get hit most by this."

As readers are likely aware, the Department of Labor's Employee Benefits Security Administration is likely to re-propose, this year, an expansion of the definition of "fiduciary" under DOL rules to encompass nearly all providers of investment advice to ERISA plans. In addition, under statutory authority already granted to it, it is likely to require that advice provided to IRA accounts also fall under ERISA's tough fiduciary standard. Of course, Wall Street and the insurance companies are opposed to this rule, for it would negate their ability to extract excessive profits from investors big and small.

This is not the first time Wall Street has played this card - i.e., threatening to leave individual investors "stranded." Each time Wall Street's business model, in which conflict-ridden investment advice is challenged, it THREATENS that the proposal would end services for "average and low-income Americans."

As if that would be a bad development! I say - let them end services!

As discussed below, Wall Street's rhetoric is an empty threat. There will be many, many advisors to take their place - and in the process of doing so individual investors and plan sponsors will receive better, higher-quality advice for far less in total fees and costs.


Fidelity, through its executive, asserts that our fellow Americans will not be served if the fiduciary standard is applied. This is a HOLLOW statement.

Wall Street's whining and attempts at obfuscation ignore fundamental economic principles. In 1970, Nobel-Prize winning economist George A. Akerloff, in his classic thesis, The Market for "Lemons": Quality Uncertainty and the Market Mechanism, The Quarterly Journal of Economics, Vol. 84, No. 3 (Aug., 1970) demonstrated how in situations of asymmetric information (where the seller has information about product quality unavailable to the buyer, such as is nearly always the case in the complex world of investments), "dishonest dealings tend to drive honest dealings out of the market." As George Akerloff explained: [T]he presence of people who wish to pawn bad wares as good wares tends to drive out the legitimate business. The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence.

In other words, as long as Wall Street is able to siphon excessive rents from investors, through conflict-ridden sales practices resulting in higher costs for individual investors (and lower returns), the business model Wall Street seeks to preserve will continue to attract bad actors. It's only human nature ... "join our firm and your compensation potential is virtually unlimited" is Wall Street's "promise" - ignoring of course the requirement that the new employee is required to sell - not only expensive and often proprietary investment products, but indeed his or her very soul.


What will happen if the fiduciary standard is applied to the delivery of advice to all plan sponsors, plan participants, and individual investors, through potential DOL (EBSA) and SEC rule-making? Economic principles and common-sense logic indicate that three dramatic developments will occur.

(7) Comments
If someone is going to be talking with plan participants, providing education or advice, then they should be fiduciaries and accept the fiduciary standard of doing what's best for the participants. So many plan sponsors THINK that they have independent advisors talking with their plan participants and they are helping them with education, only to find that those same "non-fiduciary behaving" people are actually being let loose on their employees to sell other services and financial products - often times - with significant conflicts of interest. Why not clear up the confusion and make EVERYBODY who is providing education or advice accept and acknowledge the fiduciary role. It is time to clean this up and REALLY protect the public.
Posted by Michael S | Friday, April 12 2013 at 10:55AM ET
Amen. Anyone calling themselves an "advisor" should be required to accept fiduciary status, just as anyone calling themselves a finacial planner should have a CFP, ChFC or similar widely-respected certification. Actually, it seems to me that accepting fiduciary status should be a requirement for anyone providing financial/investment advice to the public, regardless of their job description. While the product purveyors are trying to protect their distribution channels, we as a profession have to decide if we're truly fidciary advisors or simply part of the distribution chain.
Posted by Jim L | Friday, April 12 2013 at 12:05PM ET
The US brokerage interest's push back on fiduciary standing for brokers is self-defeating and sadly translates into its loosing its global market leadership role in financial services. Today other parts of the world are subscribing the traditional understanding of fiduciary duty. In the US individual investors are not afforded equal consumer protection under the law as institutions and trusts long established in commerce based on 800 years of common law.

In other parts of the world we are seeing the adoption of XBRL facilitating the free flow of data which is crippled here by brokerage interests. Unless a recommendation can be made in the context of all a client's holdings, it is not possible for the broker to know whether their recommendation increase return or reduced risk on the client portfolio or whether it enhanced tax efficiency, liquidity, cost structure, etc. of all the client holdings as a whole. Does Mr. O'Hanley have the consumer's best interest in mind? Is Mr. O'Hanley part of the problem or part of the solution? What is Mr. O'Henley's thoughts on the professional standing of a broker?

Does transparency in cost and results in the consumer's best interest influence his opinion. In the consumer's mind there is nothing to fear in transparency unless there is something to hide. And there is plenty which has been hidden which cause consumers and advisors alike to question the industry's ability to act in the consumer's best interest. There seems to be no understanding of the importance of restoring the trust and confidence of the investing public in our financial institutions based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters.

What should consumers and advisors think?


Posted by Stephen W | Friday, April 12 2013 at 12:32PM ET
I would argue that the fiduciary standard lies not in the certifications an advisor holds, nor in the company for which an advisor works. In my opinion, the true test of the fiduciary standard in a client relationship lies in the processes the advisor uses to deliver advice. ( For this argument lets assume that anyone delivering fiduciary services must have some minimal educational background and that we all agree on that. ) Would anyone suggest that an advisor should have to provide a fee-based plan to each 401(k) plan participant before they were eligible for the plan? Does everyone really need a comprehensive financial plan before buying any financial product? Until there is agreement in our industry as to the framework of those processes and the standards to be met in those processes, there can be no public confidence that they are receiving a fiduciary level of service. Should there be a universally applicable fiduciary standard accross the entire financial services industry? Are we only talking investment products here, or should be include insurances and bank products? I ask myself, where would the public accounting profession in the U.S. be without GAAP? While I think that the American College has done a great job of marketing the CFP and ChFC brands, in their current form these designations really don't guarantee the public that they will be receiving anything other than an advisor that passed some classes and took an exam. I think a standard and certification such as the ISO 9000 quality management system designations are a good model to consider in this debate. I would advocate that the focus be on defining several key issues: what the processes are that ensure a fiduciary standard in our industry; what tools can/should be used to meet those standards; and what information must be included in reports to clients to meet that standard. Once we have a definition specific to our industry we should have better agreement on where and when that standard needs to be applied, and how to designate individuals who adhere to those processes.
Posted by Eric B | Friday, April 12 2013 at 1:34PM ET
Ronald O'Hanley is doing what any executive in his place should do, minimize the business risk to Fidelity. That is where his loyalty should and does lie. Who on Wall Street would not admire someone who can make a fortune with minimal risk or responsibility?
Posted by ed s | Friday, April 12 2013 at 4:20PM ET
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