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Lay fiduciary decision-makers have difficulty in discerning conflicts of interest.
March 2, 2015 — 6:19 PM UTC by Guest Columnist Don Trone
There appear to be four central themes to the objections being raised to my editorial, Why Obama and the DOL are all wet when it comes to the proposed fiduciary rule, that appeared in this publication last week.
First, both Barbara Roper, director of investor protection for the Consumer Federation of America (in the comments section of my RIABiz op-ed) and fiduciary maven Ron Rhoades (in a column of his own, also last week) have criticized me for not waiting to see the DOL’s proposed fiduciary standard before I expressed my opinion.
My response to Barbara: I’m sorry. I didn’t know I was supposed to wait. I figured that if the president gets to express his views; the DOL gets to express its views; the Council of Economic Advisors get to express its views; the AARP gets to express its views; the AFL-CIO gets to express its views; AFSCME gets to express its views; the Pension Rights Center gets to express its views; Betters Markets gets to express its views; and the Consumer Federation of America gets to express its views that it would be OK if I expressed mine. See: As President Obama takes the gloves off, pro-broker groups throw up 'sledgehammer’ response.
The second criticism, also raised by Barbara, is that I failed to explain how requiring brokers to act in their customer’s best interests would be punitive, or negative or bad for retirement advisors.
Means to an objective
My response: Barbara is correct; I did not include that topic in my editorial. The reason is that my focus was not on whether an advice provider should put the interests of their clients first — I felt that was a given. I’ve clearly stated that position for 28 years; in every book I’ve written, every speech I’ve given, and every course I’ve taught. Instead, I wanted to focus my remarks on the best way to accomplish that objective.
I believe the most effective way to make a lasting positive change in the industry is to define principles and best practices that provide the details on how a broker and advisor can demonstrate that they have placed the interests of their client first. See: How Sheryl Garrett got a hush-hush invitation from President Obama and how she pierced the fog about putting clients first.
In contrast, the DOL has telegraphed its intention to define rules and regulations that will restrict and constrict the conduct of all advisors — brokers and RIAs alike. The DOL wants us to take a leap of faith that after it defines more rules and regulations, and increases the cost of compliance, that customers will be better served. I doubt it — more rules and regulations have seldom, if ever translated to better behavior —- ask any parent of a teenager. Inspiration always trumps negative motivation when it comes to moral and ethical decision-making.
Spell it out
The third criticism, raised by Ron Rhoades, is that I don’t understand the fiduciary concept of the duty of loyalty.
If you read any of my eleven books on fiduciary responsibility you’ll see that they all include the elements of a duty of loyalty. I don’t use the specific terms “duty of loyalty” or “duty of care” in my writing because real people don’t understand the terms. Real people, such as advisors, trustees and investment committee members, want to know in plain English what they need to do on a step-by-step basis to be able to demonstrate that they have met a fiduciary standard of care. See: 7 things a financial advisor needs to know to succeed in the 401(k) business.
When I started the Foundation for Fiduciary Studies in 2000, we continued with this writing style and philosophy and in 2003 published the handbook, Prudent Investment Practices. When you review that handbook, you’ll see that seven of the 27 best practices deal specifically with the duty of loyalty. That handbook, or derivative works of the handbook, is still the most widely quoted and cited document on fiduciary best practices. Look for yourself.
Also, my work with the U.S. Government speaks for itself. In 2003, the U.S. Secretary of Labor appointed me to the ERISA Advisory Council to assist the DOL in understanding the conflicts of interest with the Enron case. In 2005, the SEC asked me to help train their enforcement staff so that they could conduct more effective investigations into pay-to-play schemes. In 2007, I was asked to testify before the U.S. Senate Finance Committee on the fiduciary issues associated with the use of hedge funds and alternative investments in pension plans. When you read my testimony, you’ll see that I discuss the difficulty lay fiduciary decision-makers have in discerning conflicts of interest.
The fourth criticism, also raised by Ron Rhoades, is that I don’t understand the connection between a fiduciary standard and trust.
Again, he is mistaken.
In 2007, when I made the very difficult decision to leaveFI360, I accepted an offer to return to the U.S. Coast Guard Academy to head the newly established Institute for Leadership. One of the reasons I accepted the offer was because I wanted to examine the link between a fiduciary standard of care, and trust and leadership. See: TD throws its first client-best-interest summit, a micro-event, by 'candlelight’ in Palm Beach and ideas rise from the RIA deeps.
Trust and leadership are inextricably linked — in large part because of physiological reasons. The portion of the brain that processes the emotions we attribute to leadership is the same portion of the brain that processes the emotions associated with trust.
In contrast, the part of the brain where we process complex communications, such as a fiduciary standard, is separate and apart from where we process leadership and trust. Simply stated, an advisor is going to have difficulty building trust with a client if trust is based solely on the elements of a fiduciary standard of care. To build client trust and loyalty an advisor must be able to demonstrate the attributes we normally associate with genuine leaders and stewards. See: RIA leaders venture to Grand Canyon to get beneath Earth’s surface — and their own.
This research is backed by different industry surveys, including the 2007 RAND survey commissioned by the SEC, where the objective has been to determine whether a person understands the differences between a fiduciary and suitability standard. In every survey, the majority of respondents have said, “No, they don’t understand.” Furthermore, they indicated that they didn’t care. What the person cared about is that they could trust their advisor. In other words, what’s important to clients is that they are able to view their advisor as a leader and steward — most clients don’t care whether their advisor is subject to a suitability or fiduciary standard.
Over the past seven years, I have been focused on a new body of research — called, LeaderMetrics — that examines how leadership, stewardship and governance (be it a suitability or fiduciary standard) can be integrated into a single framework. When integrated, leadership and stewardship evoke an even higher sense of purpose than fiduciary. Our research caught the eye of The Thayer Leader Development Group at West Point, and, as a result, we now conduct leadership development programs for elite financial advisors at West Point.
I want to address one other baseless accusation made by Ron; that I am critical of the “... dozens, if not hundreds, of individuals who have labored to advance the profession.”
That was not my comment. Again my record on working with tens of thousands of advisors and trustees in advancing fiduciary best practices speaks for itself. So to be clear about the individuals I am critical of, they are the members of fiduciary advocacy groups who have turned a blind eye to unethical, and in some cases, illegal behavior.
Few good advisors
To close: Financial advisors (whether they are subject to a suitability or fiduciary standard) who are managing our nation’s retirement assets need to demonstrate the same qualities that we use to measure a leader, to wit, that they are men and women of character, competence and courage, and that they have a purpose, passion and process for protecting the long-term interests of others.
You see — a simple, positive statement. There’s no need for complex rules and regulations. Rules can be worked around, whereas principles inspire better behavior that eventually becomes contagious. We proved that with the fiduciary movement when it was centered on the Foundation for Fiduciary Studies. See: Top RIA lawyer explains to the SEC why 'harmony’ is a harsh misnomer and why the price of its false spin is paid by investors.
Isn’t this a better approach than calling financial advisors “snake-oil salesmen”?
Don Trone, GFS® is the founder and chief executive of 3ethos. He has been involved with the fiduciary movement for more than 28 years. He was the founder and former president of the Foundation for Fiduciary Studies, and was the principal founder and former chief executive of FI360. He has authored or co-authored twelve books on the subjects of fiduciary responsibility, portfolio management, and leadership.
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