"All genuine leadership is built on trust."

-Ken Blanchard, The Heart of a Leader

There's a growing consensusamong economists that the recession is over, or will be by the end of the year. Their announcements, and a strong stock market recovery so far this year, may lead some to believe that the investing public's trust in the financial services industry has been restored.

Don't believe it for a second. The financial services industry is based on trust, and that trust has been breached.

Trust, once broken, takes years to repair, if ever. And we're not talking about a new paint job or replacing the window treatments. We're talking about digging into the very foundation or core of our industry and making meaningful, structural changes; we're talking about changing the DNA and genetic makeup of the financial services professional.

Establishing a fiduciary standard of care for all parties involved with the financial services industry—from regulators to individual advisors, and every party in between—is critical. Fiduciary responsibility is also based on trust, whether it is formally and legally defined or simply conveyed by the level of confidence one party has in another.

MUTUAL REINFORCEMENT

Staying with the engineering analogy, the financial services industry must be built upon mutually reinforcing mechanisms. Trust can only be restored when each mutually reinforcing mechanism can demonstrate it's fulfilling its critical fiduciary role and responsibilities. A structural failure of one mechanism can mean further destruction of trust.

Regulators need to demonstrate that they have fiduciary responsibility for oversight of the financial services industry. Regulators, including the SEC, DOL and Treasury, and the supporting SROs (FINRA and SIFMA to name the two largest), need to act as fiduciaries for the financial services industry. Regulators have a fiduciary responsibility to the public. And they have failed in their fiduciary responsibilities in two critical areas: staying informed, and staying current.

Staying informed: Regulators have acquired the reputation of having a bunker mentality-of being insular. Through the eyes of many regulators, the world is made up of two types of people, fellow regulators and everyone else, and everyone else is a suspect or a conflicted party. Regulators loathe reaching out to industry experts for help in understanding the risks associated with new instruments and strategies being developed on Wall Street, or following up on unsolicited tips from knowledgeable industry experts.

Staying current: Regulators haven't been able to retain motivated, experienced staff. It's not uncommon for a newly minted attorney to spend a scant 18 months with a regulator, and then leverage the experience and contacts to gain a more lucrative position on Wall Street. I believe most young men and women who accept federal positions do so with the right intentions, but are quickly discouraged and disheartened by the insular mentality noted above.

It's only when regulators realize they have a fiduciary responsibility to the public, and act accordingly, that they can change their current culture, retain more qualified people, and provide more effective regulatory oversight.

Officers and directors of financial services firms need to demonstrate that they have fiduciary responsibility for the development of their investment products and services. Of the mutually reinforcing mechanisms, this is the more challenging one, since officers and directors often have conflicting responsibilities: They have a fiduciary responsibility to their shareholders and to the investing public who buys their products and services. This conflict needs checks and balances; serious problems occur when there's not. Unfortunately, for 20-plus years the emphasis has shifted almost exclusively to the production of profits for the benefit of shareholders-at the public's expense. A strong and effective regulatory structure would help keep the conflicting roles in balance.

Attorneys and accountants need to demonstrate that they have fiduciary responsibility for the integrity of investment products and services. This isn't going to make me popular with the ABA or the AICPA, but attorneys and accountants aren't getting enough blame for today's crisis. Anyone who has hung around the industry long enough knows that officers and directors don't go to the restroom without first receiving two legal opinions. You can bet every subprime mortgage-backed security that was packaged and sold as a relatively risk-free instrument included an "opinion" from an attorney and accountant.

Trust can only be restored when the investing public can again rely on these professionals' signature. Yes, attorneys and accountants have a fiduciary responsibility to the firms that hire them, but they also have a professional responsibility to the public, and they shouldn't participate in the development or implementation of products or services that aren't in the best interests of investors.