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Industry experts draw battle lines in defining fiduciary
September 25, 2009 — 5:28 AM UTC by Elizabeth MacBride
A week ago I wrote a post aggregating speeches and position statements on the definition of the fiduciary standard. I quoted everyone from Mary Schapiro to the Supreme Court to the Committee for the Fiduciary Standard, pressed the send button to Brooke, and expected that would be my last fiduciary post for a while. Other issues are bubbling away on Capitol Hill, even in the shadow of the health reform debate.
Somewhat to our surprise, the fiduciary post grew a long stem of passionate, well-thought-out comments as knowledgeable people took up the discussion. They cleared up a few points – and raised some new questions. I’ve done my best to summarize it here. -Elizabeth MacBride
At first glance, debate over the definition of fiduciary seems to be between expanding the current fiduciary standard, based on the Investor Protection Act of 1940 and case law interpreting it, and establishing a new fiduciary standard. Three readers wrote to tell us that it’s actually much more complicated than that.
Jan Sackley, principal at Fiduciary Foresight, pointed out that fiduciary law has been evolving for hundreds of years.
Lawyer Ron A. Rhoades sent us more than 2,100 words on the fiduciary standard, including this: “The fiduciary standard of conduct has been called “the highest standard of conduct under the law.” In American law, it has generally been held to give rise to two major duties – the duty of due care and the duty of loyalty. A third duty – that of utmost good faith – is sometimes held to exist, mostly as a “gap- filler” by courts in fashioning relief in which a breach of the other two duties does not clearly exist.”
Stephen Winks, principal of SrConsultant.com, pointed out that the Uniform Prudent Investors Act (UPIA) and ERISA contain practical guidance for advisors and establishing what their fiduciary obligations are. Why not use them to help establish new regulations covering both advisers and brokers? There are good reasons that both financial advisers and wirehouses want to keep a more general fiduciary standard, rather than a specific one.
By e-mail, he notes that “The more specifically we define advice, the more important it becomes to simplify its execution. That requires enabling processes, technology and scale which by definition is beyond the reach” of many small advisers.
On the other hand, “the wirehouses want … a generalized fiduciary standard of their liking, which (1) keeps trade execution as a profit center and (2) allows for principle trades—both prohibited transactions under ERISA.”
Complicated or not, Washington, D.C., is taking this issue on. That’s another reason that people are serious about fiduciary right now. The Obama administration and the Democrat-controlled Congress show every indication of being serious about more regulation of the financial services industry.
The question, says Knut Rostad, chair of The Committte for the Fiduciary Standard, is not whether there will be a fiduciary standard written into the new regulations, but what it will look like.
Second, many people have a vested interest. Wall Street cares, as do advisers. But there are others – and more may come out of the woodwork. The vast securitization of the American economy over the past 20 years means that investment principles are of interest to an exponentially larger number of people.
Clark M. Blackman, incoming chair of the American Instutite of Certified Public Accountant’s Personal Financial Planning Executive Committee, posted this: “I have been very directly involved with this question of who is a fiduciary, and what does it mean to be one, for many years. I am finally getting excited about the opportunity that lies ahead for the investment industry, the individual advisor who wants to be considered a professional, and the investing public, who desperately need to be able to count on their advisor to ALWAYS do what is right by them.”
One of the reasons the fiduciary standard debate is so hot is that it touches a live wire: the often-acrimonious relationship between advisers and brokers. Rostad likens the two groups to the sides in the abortion debate. Each side looks down on the other. Separated by a cultural chasm and by this time, “both sides have a briefcase full of examples of times where they have been unfairly maligned and misunderstood.
“That is true, agrees Diahann Lassus, president of Lassus Wherley and former chairwoman of the National Association of Personal Financial Planners.
“That’s where we get wrapped around the axle sometimes,” she says. “(But) it isn’t about right and wrong. It’s about whether or not the consumer understands the standard.”
Indeed, the first commenter on the thread, Bob Ellis, head of the wealth management research and advisory practice at Novarica, pointed out how counterproductive the animosity might be:
“Unless both sides come together and acknowledge their strengths and problems as well as those on the other side, I think this dispute will wind up as a “pox on both their houses” and speed the movement to self-service for the mass affluent.”
Editor’s note: Notably absent from the fiduciary discussion seem to be the people who speak for the FINRA, SIFMA crowd. What’s behind that? – Brooke
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