Fiduciary Duty: What’s Not To Like?

January 8th, 2011
by Jonathan Leidy

There is a debate raging in the retirement industry, as well as the financial industry at large, and most investors have no idea. The debate centers on whether or not advice-providing investment professionals should be required to adhere to a fiduciary standard. In the simplest terms, a fiduciary standard is one requiring a professional to place their clients’ interests above their own at all times.

On the surface, it’s hard to imagine that this concept would be the subject of debate at all. It is akin to a politician who enthusiastically takes the stage to voice his or her “landmark” opposition to drunk driving, child abuse or world hunger… it’s pretty hard to contradict. In fact, when presented to most clients, they have a hard time even imagining what the other side of the argument might be.  Yet the vast majority of Wall St. firms have a significant and vested interest in lobbying for something far less restrictive.

The standard is known as a disclosure standard, and the list of its advocates, as represented by the Securities Industry Financial Market Association (SIFMA), is as infamous as it is predictable:  AIG, Alliance Bernstein, Bank of America/Merrill Lynch & Co., BlackRock, Citigroup, Deutsche Bank, Goldman Sachs, ING, Morgan Stanley Smith Barney… You get the idea.

What these powerhouses prefer is a standard whereby investment professionals are free to make recommendations and take actions that are inherently conflicted, as long as those conflicts are adequately disclosed. They further claim that the imposition of a fiduciary standard will limit investor choices and increase investor costs.

Advice-providing investment professionals governed by a disclosure standard are, of course, under no explicit obligation to introduce conflicts into their client interactions. In fact, Wall St.’s argument seems to be that the fiduciary standard is so incontrovertible, there is no need to even write it down. Investment professionals will naturally and consistently gravitate towards the sensibility and scrupulousness of providing client-centric recommendations.

Undoubtedly there will be those investment professionals who, held to nothing more than a disclosure standard, will act in their clients best interests. They exist right now. However, why not memorialize it, just to be sure. The famed line from Hamlet comes to mind, “The lady doth protest too much, methinks.”

In fact, if you follow that line of thinking, why have regulations at all? If everyone knew exactly how to behave, we certainly wouldn’t need the Dodd-Frank Act, the House Financial Services Oversight Committee, or the countless reams of regulatory dictums that line the shelves at the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority, or the Department of Labor.

On January 21st, the SEC is set to submit their official recommendation to Congress regarding professional standards for advice providers. Unfortunately, early indications suggest that the securities regulator is going to advocate for a disclosure, not a fiduciary, standard.

The Committee for the Fiduciary Standard (CFS), a group created specifically to argue in favor of a universal fiduciary standard for investment professionals, is concerned. From their website:

“Investors need financial help planning for their retirement and must be able to count on professionals that they can trust. Just as they need to count on doctors to handle their health concerns. The authentic fiduciary standard legally requires a financial advisor to act, like a medical doctor, completely in their clients’ best interest. In contrast, the “arms length” (or disclosure) standard allows a broker or advisor to sell clients products in the best interest of his or her employer. This difference is stark. If an investor is wronged by a broker, the investor’s burden is to prove the broker is wrong; if the investor is wronged by a fiduciary advisor, the advisor’s burden is to prove he or she is right.”

Investors benefiting from transparent, conflict-free advice… What’s not to like?

Read More: