Why we should all be moving toward a fiduciary society
As you read this, the SEC is going through yet another review of a common standard of care that would apply to all providers of financial advice.
And, once again, the wise money says the Commission will give us something closer to a suitability standard, although they’ll no doubt try to make it seem like a fiduciary standard. The lobbying muscle of the brokerage firms, plus the independent broker-dealers represented by the Financial Services Institute, are likely to convince regulatory policymakers that it’s important to preserve so-called choice in the financial marketplace.
Let’s be clear. In this context, the word “choice,” like the word “fiduciary,” is shorthand for a fairly complicated concept. When brokerage lobbyists use the term, they are actually saying a consumer should have the choice to receive advice not only from professionals who are pledged to give recommendations and analysis purely in the client’s best interests, but also from reps and salespeople posing as objective parties. Many of the latter will be hiding a sales agenda that dictates they must recommend high-commission or high-fee investment options.
“Choice” is a clever word choice, because it obscures the core issue, which is client confusion over which advisors can be trusted, and to what degree. Real choice, of course, can be achieved only when roles and obligations are clarified enough that clients can clearly understand what they’re choosing in an advisor. Study after study, including the SEC’s own RAND study, have shown that this degree of clarity exists only in a parallel universe.
Because regulators including the SEC and the Department of Labor are involved, we tend to think of the fiduciary concept only in regulatory terms. But I think most of us intuitively realize that the fiduciary concept is actually a formula for what we want in every aspect of our lives. We select friends who will tell us what we need to hear, not what we want to hear, and who would do anything for us and know that we would do the same for them.
Any person or company attempting to argue it should be held to a lesser standard should be regarded with intense suspicion
In business, we tend to avoid companies that have visibly breached ethical boundaries — companies including Wells Fargo and (to take less recent examples) the representatives like Fabulous Fab who repackaged junk loans and sold them at a premium until they nearly destroyed our global financial system.
Consumers are developing an increasingly fine instinct for recognizing who is and who is not on their side. Over the years, lay investors have given increasing market share to fee-compensated advisory firms, despite millions of advertising dollars spent by the dwindling brokerage community.
Signs of mistrust crop up even where there are existing brokerage relationships. The surest way to know an article is directed toward sales agents is when it discusses how to find out if clients are hiding assets from them, or the best formula for overcoming objections to their advice. These are not issues that keep NAPFA members up at night.
Although it is seldom articulated as such, we try to hold our elected officials to similar standards. When a member of Congress puts his or her own interests ahead of the country’s, we call it corruption.
The point that I wish the SEC staff would understand is that any meaningful fiduciary debate is not about choice at all. “Fiduciary” is a shorthand term for good business practices that build a mutually supportive bond between a service provider and the public. And more than that, it defines what we all look for from the people to whom we give our trust.
Any person, company or representative organization attempting to argue it should be held to a lesser standard should be regarded with intense suspicion. Sure, it’s probably less profitable, in the short term, to recommend a portfolio of low-cost ETFs than one made up of expensive non-traded REITs, or a tricky wrap account with a variety of hidden fee-sharing arrangements.
But fee-compensated planning firms are managing to take home very reasonable profits despite the hindrance of making recommendations that will actually benefit their clients. I would argue that fee-compensated advisors are also far less likely to require close regulatory supervision, because they’ve voluntarily given up the temptation to recommend shoddy products simply because someone is willing to pay them a fat commission.
Truly ethical firms that want to build their businesses on a foundation of trust will embrace fiduciary principles as their most important core business practice. By taking the high road, they are acting in their own best interests as well; they are far less likely to suffer reputational risk, scandal and diminishing market share. If Wells Fargo had embraced fiduciary as a core ethical principle, the firm (and its customers) would be in a very different position today.
Instead of thinking about the term “fiduciary” purely as an obligation or regulation, I invite all of us — including regulators, the public and all members of the financial community — to envision it as something much bigger: a way of life.
Picture a fiduciary society, where all of us take seriously an obligation to look out for the interests of everyone we live and work with. Wouldn’t that be a better world than the one we live in today?
I invite the SEC to recognize that some firms have been living that ideal and thriving. If you want to give choice to consumers, make it clear who is and is not willing to live up to the principles of a fiduciary rule. Do this by forcing reps and sales agents to identify themselves as non-fiduciaries who have made the choice not to put the best interests of their customers ahead of their own and their employers’.
Consumers are developing an increasingly fine instinct for recognizing who is and isn't on their side. Over the years, lay investors have given increasing market share to fee-compensated advisory firms, despite millions of advertising dollars spent by brokerages.
In the land of the free, advisors can opt out of a fiduciary strategy and avoid SEC registration. But let the people choose whether that’s what they prefer when all the cards are face up on the table.
If we were all given that clarity in all aspects of our lives, personal as well as business relationships, I think we’d make better choices about who to trust, who to befriend, who to vote for. If we all embraced the concept as a core personal value, business or otherwise, there would be more trust and harmony in our troubled world.
The SEC can get us started.