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The New Fiduciary Debate

It's really hard to argue, in the court of public opinion, that a provider of advice should avoid putting the interests of the recipient of advice ahead of his or her own. The brokerage world tried it, and eventually came to abandon that losing strategy for a much cleverer four-step game plan:

1) Focus the debate on the confusing term “fiduciary.”

2) Define “fiduciary” narrowly as generally looking out for the client's interests.

3) Redefine what it means to look out for the client's best interests as a lot of disclosures and paperwork plus the suitability standard.

4) Embrace this distorted definition of “fiduciary” and argue that you were in favor of a fiduciary standard all along.

If advisors want to counter this clever ploy, they're going to have to stop parroting the idea that everybody should be held to a fiduciary standard, and instead attack each of the measures that are being taken to undermine the core concept. Fortunately, some of our organizations are beginning to undertake this important work, and I think the planning profession should recognize and embrace their efforts.

The fiduciary concept was never just about simply being loyal to clients–a slippery concept in the best of times. If you go back to the Prudent Man Rule (yes, it should have been called “Prudent Person Rule”) and the updated Uniform Prudent Investor Act, it is quite clear that being a fiduciary on behalf of another party involves a variety of more-or-less detailed prudent practices. Somebody who means well but is sloppy, careless or incompetent fails the test. A brokerage firm could argue that its top salesperson meant well when he exclusively recommended in-house investment platforms and sold variable annuities to aging widows. Who has the power to read his mind and determine otherwise?

In this context, the fi360 organization has consistently provided research and tools that identify a host of best fiduciary practices in the context of ERISA standards: determining what kind of portfolio is needed, processes for screening and selecting investments that meet the need, monitoring and controlling expenses across the chain of service providers, and providing clear, regular communication that allows the end client to understand what's happening and why. THIS is what we mean by “fiduciary,” and brokerage firms should not be allowed to cheapen it.

More recently, others are joining the attack on the cynical redefinition of “fiduciary.” I just received Don Trone's latest book, entitled LeaderMetrics, which provides guidance on leadership, stewardship and governance–many of the same concepts that fi360 has been exploring. I found it interesting that the word “fiduciary” doesn't appear anywhere in the book, until I remembered that Trone told me a couple of years ago that the word had been bandied about so carelessly that it has lost any meaning.

Coincidentally, a few days before, I received notice that the Institute for the Fiduciary Standard (Knute Rostad's organization, not to be confused with the Committee for the Fiduciary Standard) has begun work on identifying the key principles for fiduciary best practices. They look a lot like Trone's leadership-related building blocks: character, avoidance of conflicts of interest, reasonableness and transparency of fees and expenses, and clear and truthful communication with clients. (You can find the report here:

Speaking of the Committee for the Fiduciary Standard, it is espousing, in addition to the clients' interest first concept, four additional “core principles:” acting with prudence, defined as the skill, care, diligence and good judgment of a professional; providing full, fair and conspicuous disclosure of all important facts; avoiding conflicts of interest; and fully disclosing and managing in the client's favor any conflicts of interest that cannot be avoided. By now, this should sound familiar.

Only a small part of the overall financial services industry believes it is important to protect consumers from potential abuse by those calling themselves financial advisors. The the brokerage industry's belated embrace of its own definition of “fiduciary” is a clever effort to co-opt an argument it cannot win in the court of public opinion, a way to forestall meaningful protections which would erode or destroy its revenue model.

If advisors are able to get a more detailed definition of “fiduciary” into the public debate, as some of its organizations are now doing, it puts FINRA and SIFMA in the same awkward position they were trying to escape. It forces them to argue with a straight face that those who give advice should not be required to take clear procedural steps to identify the best investments for clients. They'd be forced to ask why would anybody want to keep expenses to a minimum and disclose alternatives to their customers? Who would want their advisor to manage in the client's favor any conflicts that cannot be avoided?

We make up for our lack of numbers by having arguments so powerful that the other side looks ridiculous when they try to counter them. As the arguments evolve, as more detailed procedures surrounding “fiduciary” become part of the public discussion, the fiduciary standard will grow stronger every time the brokerage world tries to weaken it.

More specifically defining "fiduciary," and starting a debate about process and real-world actions, is not just a great lobbying tactic with our regulators. If the enemies of a real fiduciary standard really think it's a good idea to question the importance of character, fair pricing, clear communications and identifying and avoiding conflicts, let's get them on the record. The debate will help consumers know how to recognize who is and is not in their corner–an outcome which will trump regulation every time.