There is a growing consensus in Washington and on Wall Street that soon we will have legislation and regulations that will "harmonize" standards for investment advisors. Presumably, all financial intermediaries who provide investment advice will be held to a fiduciary standard of care.

Recently, senior executives from several broker-dealers asked me what their organizations needed to do to transition from a suitability to a fiduciary standard of care. I showed them the framework of an investment decision-making process designed to fulfill a fiduciary standard, explaining that all they had to do was put the framework in place.

If I were asked the same question today, my response would be different: You first have to change the culture of the brokerage industry. Before a fiduciary standard can be put in place, there has to be a fundamental shift in the behavior of regulators and broker-dealer senior management. They must move from a rules-based framework, which requires little standard of care, to a principles-based framework, which requires a high standard of care.

The chart, "Connecting Head and Heart," graphs this relationship. The X-axis shows a level of discernment (the ability to judge wisely and objectively), and the Y-axis illustrates a level of behavior (a standard of care). In the bottom left-hand corner are rules-based elements and in the upper right-hand corner, principles-based elements. There is a gradation here: Compliance requires the least amount of discernment and elicits the lowest standard of behavior, whereas an ethos requires the greatest amount of discernment and elicits the highest standard of behavior.

FOLLOW THE RULES

Rules-based elements define a minimum standard of care and require no discernment; a rule's a rule. Rules-based elements include compliance, suitability standards and codes of conduct:

* Compliance is the act of adhering to rules, and it represents the minimum level of conduct. The current regulatory regime for broker-dealers is rules-based, with a heavy emphasis on compliance. Self-regulators, such as FINRA and the Securities Industry Financial Marketing Association (SIFMA), attempt to define rules for every issue, circumstance or question that may arise during a financial transaction. Unfortunately, there is little evidence to suggest any correlation between the number of rules that are promulgated and behavior; more rules do not translate into better behavior.

* Suitability standards require a broker to provide products and services that are suitable for the client. At issue with suitability standards is the low level of discernment brokers must have when advising clients; brokers merely need to demonstrate that a product or service is suitable. A low level of discernment goes hand-in-hand with behavior and is often correlated to a low standard of care.

* Codes of conduct are sets of rules governing the activities of people, especially members of professions. We don't see many codes of conduct in the financial services industry, but they're worth plotting as a frame of reference. A code of conduct is rules-based and differs from a code of ethics, which is principles-based. The most noted code of conduct is defined for the members of Congress. Abuses associated with the Congressional Code provide an excellent indictment of rules-based standards; rules do not elicit a high level of behavior.

PRINCIPLE OF THE THING

In contrast, principles-based elements tend to promote a higher standard of care. They include codes of ethics, fiduciary standards and ethos:

* Codes of ethics are sets of principles governing the conduct of people, especially members of professions. Ethics is intended to define behavior prescribed by principles, not rules. The CFP's Code of Ethics is an excellent example, requiring planners to have a high level of discernment, which in turn promotes a higher standard of care.

* Fiduciary standards are defined by principles that require advisors to act in the best interests of clients. Most people would be surprised to learn that there is little law governing the conduct of investment fiduciaries. Instead, the fiduciary standard is based on several simple principles supplemented by best practices, regulatory opinion letters and case law. The investment fiduciary must show procedural prudence (judgment and objectivity) at all times, which also promotes a higher standard of care.

* Ethos is the link between behavior, principles and discernment. In addition to the moral behavior (ethics) of the advisor, ethos also examines the advisor's leadership behavior and decision-making process. Ethos is ethics on steroids; the difference between good and great investment advisors can be explained in terms of the advisor's defined ethos.

CHANGING THE CULTURE

Returning to the questions at hand: What must the brokerage industry do to support a fiduciary standard properly? How do we move from a rules-based, compliance-driven culture to a principles-based fiduciary standard? How do we rewire the wirehouses so that a fiduciary standard can be effectively implemented? How do we move the brokerage industry culture up and to the right-up from a rules-based orientation and over to the right, to a higher level of discernment?

It's won't be easy, and providing fiduciary services won't be for everyone. Some brokers will elect to stay brokers. Remember, the language of the proposed fiduciary standard is intended to apply only to broker- advisors who wish to provide comprehensive and continuous investment advice or financial planning services. The new legislation and regulations are not intended to affect traditional brokers who are purely executing trades or selling financial products.

However, broker-dealers who do wish to implement a fiduciary standard will need to redefine their cultures and reevaluate what they consider to be the essential behavior of their broker-advisors. They must place greater trust in their broker-advisors' abilities to discern the best interests of their clients and give broker- advisors more credit for judging the needs of their clients wisely, objectively and well. Broker-dealers that are reluctant to place such trust in their brokers should not provide fiduciary services.