Where Barbara Roper and Ron Rhoades lose traction in their fiduciary arguments

Mr. Trone, to what behavior are your referring here? “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.” I’m confused.

The combative tone aside, reading this helps me to understand better the point that Mr. Trone was apparently making in his previous column. It isn’t simply that he is condemning a DOL rule proposal sight unseen, instead he is questioning the notion that any rule offers potential benefits. As he states, “more rules and regulations have seldom, if ever translated to better behavior.” While I would never question Mr. Trone’s right to express his views, I do strongly disagree.

To name the most obvious example, market conduct was dramatically different after the laws and regulations of the 1930s and 1940 were adopted than it was before. The rules didn’t solve every problem, but they made a difference. While some people may be inspired by principles to do the right thing, others may need the threat of legal accountability to keep them in line. There is room in our system for both inspiring principles and “punitive” rules. But it is also unquestionably true that some individuals will ignore both principles and rules. Their victims have a better chance of recovering their losses if the abusive conduct actually violated some rule on the books.

There is much more in this column that I see as misguided, not least citing investors’ instinctive trust of their advisers as a reason for opposing rules to hold those advisers accountable for acting in a trustworthy fashion. While we both support raising the standards for advisers, it appears we will simply have to disagree about the best way to achieve that goal.

Investors assume advisors they like and trust put their financial interests first. They do not know there are two ethical standards for real advisors and sales reps. Even if they did know they have no way of determining who is providing ethical advice and who has conflicts of interest. More rules will not protect investors who do not know they need the protection. The personal ethics of advisors will be the driving force. Unfortunately, they have no valid way to prove they are ethical and investors have no way to measure their ethics. Fiduciary standards could end-up being a marketing ploy.

The beauty of a free market is that the “principles” vs. “rules” approach to fiduciary duty need not be divisive as long as each approach can be authenticated back to statute to the satisfaction of the consumer. Because “in principle” fulfilling fiduciary duty entails personal opinion which may or may not achieve the consumer’s best interests, wouldn’t fulfilling fiduciary duty “in fact” or “rules” be preferable as the depth and breadth of counsel would be self evident and less likely subverted.

My preference is an expert authenticated prudent investment process with specific client deliverables (asset/liability study (perhaps without the formal expense of an actuarial study for individuals), investment policy, portfolio construction and performance monitoring) which illustrate the values addressed and managed by the advisor in the fulfillment of their fiduciary duties. The authentication back to statute would very nicely affirm Don’s good work in delineating fiduciary duty and would be compelling in establishing professional standing. The industry would compete on the basis of how adept it is in rendering advice. Thus the advisor would gain control over their value proposition, cost structure, margins and professional standing, presently not possible in brokerage (transactions) format.

Brokers (no advice), planners (needs based selling), consultants (advice sold as a product by brokers), fiduciaries (advice as a prudent process managed by advisors) all constitute a level of financial service, but not all are acting as fiduciaries. These distinct levels of financial services will be reconciled in the marketplace without denigration of fiduciary duty.

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Stephen Winks

At the heart of this discussion is a problem that has bedeviled the fiduciary movement for years. The fiduciary standard is actually a fairly simple and straightforward set of principles that were established centuries ago and have been refined through interpretation by the courts over the years. However, a host of truly well-meaning fiduciary advocates have insisted on trying to annex a wagon-load of so-called “best practices” and other concepts to the standard, itself. The poor standard cannot bear the weight. The conversation about the fiduciary standard has now become so mixed up with concepts of stewardship, leadership, brain chemistry and volumes full of rules related to so-called best practices created by individuals who, frankly, have no mandate to create those rules, that we have no hope of getting the simple, uniform fiduciary standard established for the advisory community. I think it is great if Don Trone and the other good soldiers who have fought so hard to improve the quality of advice in this country want to teach their version of best-practices. But if we are to have a chance of seeing a meaningful uniform fiduciary standard established in our life time, we need to separate the simple, basic fiduciary standard from the so-called best practices and the other baggage that has been loaded on to it. The burning principles of the basic fiduciary standard stood the test of time for centuries without books full of best-practices to support it. We all should get on board and support a simple, understandable fiduciary standard—like the one that has been in place for RIAs for decades—and stop complicating the matter. Let’s give Congress, the DOL and the SEC a crystal clear target to shoot for—one that delivers the fundamental and unassailable message that client interests shall always come first.

Scott – I’d like to address your issue with best practices. To use an analogy – long-standing principles of fiduciary conduct are like a skeleton – best practices are defined to provide the muscle, the skin and hair to bring the subject to life. There have been numerous times when the courts have relied on the best practices defined by the Foundation for Fiduciary Studies to bring clarity to an ambiguity in the law. Likewise, when I was asked to advise the DOL, SEC and U.S. Senate Finance Committee on apparent fiduciary breaches and conflicts of interests in the industry, we used the Foundation’s best practices to help illuminate answers to their questions. Unfortunately, the Foundation was sued by a for-profit company the very month the Dodd-Frank Act was signed, and the Foundation no longer exists. The Foundation would have been a good resource for the White House team and DOL when they were working on their re-proposed fiduciary standard. For example, 3 of the Foundation’s 27 best practices dealt specifically with fees, expenses, and potential conflicts of interests associated with payment flow – the very issues that were raised by the President last week.

Don, I truly do appreciate and respect the work that you and others have done to help educate people about the real-world application of the fiduciary standard and illuminate its underlying principles. My concern is really a practical one relating to tactics. My desire is simple. I want clients (e.g. our moms, dads and kids) to have the benefit of the fiduciary standard, regardless of what firm they are working with. Clients should not have the protection when they walk into the office of the local RIA, but not have it when they walk into the offices of a wire house. I am frustrated—no actually, I am angry—that the powers that be have fiddled around for 5 years since the passage of Dodd-Frank and still we have no universal fiduciary standard in place. My fear is that “we” are partly to blame. We have over-complicated the discussion and taken it from the realm of a simple, emotionally appealing quest to protect our friends and family into a highly technical debate that is intellectually demanding and has created squabbles among the fiduciary advocate community. In fact, as the discussion above demonstrates, the focus, at least in part, has shifted to the personalities involved and away from the important principles that are at stake. At the heart of it, we all want the same thing. I believe we would have a better chance of achieving it, if we keep it simple. If I were a wire house lobbyist, I would walk into the offices of each Congress-person, the SEC and the DOL and put a stack of your 11 books on the desk and say: “Look, it took one of the smartest guys in the industry 11 volumes to explain this principle. How difficult, burdensome and costly do you think it will be to implement this standard?” Then I would offer up a copy of this series of RIABiz articles and comments and I would say: “See, the people in favor of it can’t even agree on what it is.” Then I’d walk out the door.

Scott,

Simplicity is certainly desirable, therefore simplifying 'the devil in the fiduciary details” is essential for the promotion and achievement of professional standing. This can not result in the denigration of fiduciary duty but requires a lot of thought in managing fiduciary duty so it is not denigrated. Professional standing in advisory services is not a simple declaration but must be evidenced in the duties entailed. This is were “best Practices” are helpful.

I believe the alignment of the advisor and the consumer’s best interest are imperative. How are best practices which simplify the execution of advice, not in the consumer’s best interest?

Let the free market compete on the basis of the depth and breadth of expert authenticated advice being provided. This is the beginning of professional standing for advisors. With objective, non-negotiable fiduciary criteria with an audit path back to statute, there is no wiggle room.

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Stephen Winks

Steve, Scott, don et al,

I have kept myself out of this estimable discourse because it is hard to improve upon.

Yet my twitchiness to contribute outran me with Steve’s last comment. He took the dialogue away from what exactly the fiduciary standard is to how exactly you say what the fiduciary standard is.

Maybe a journalist has something to add on this score. If we know nothing else as scribblers it is that few things are underwritten. Most things are described in way too many words. To Scott’s point, it is no good to say: We need a standard so go memorize these 11 books. It may also be too terse to say merely that an advisor needs to put a client’s interest’s first.

I’d submit however that the middle ground must lie much closer to the latter than the former. Good communicators have a sense of what the reader knows without laborious explanation. Bad communicators obscure their ignorance of the real nub of the matter behind blizzards of words.

Thinking required.

Brooke

Mr. Trone:

The Pension Protection Act of 2006 was passed and signed into law, logically, in 2006. That law requires the Department of Labor to take the actions about which you seem to be critical. It has taken the DOL nearly eight years to extend the ERISA standard for advice and management of retirement accounts to the act of “rolling over” an employer sponsored, ERISA qualified retirement plan to an IRA. Meanwhile I have witnessed pervasive marketing of high-cost, high-risk investment products with astonishingly high commissions targeted at roll-over accounts and the enthusiastic selling of those products by many, many broker-dealer employed salespersons. I have also seen case after case of 403(b) programs where most of the options are composed of high-commission insurance and securities products.

In all of those cases the concept employed by the sales force was not that of a fiduciary but rather that of caveat emptor. The participants in those plans, including those offered by educational institutions, are simply not in possession of the knowledge necessary to realize what poor and ineffective choices they were offered. It is in just those situations where the rule of law needs to be in place to protect members of the public, and the general public well-being.

Given your work on the fiduciary standard I find it amazing that you are opposed to the Department of Labor finally acting in accordance with the law, and in doing so stepping in to restrict financial salesperson behavior to the standard we expect of a professional in any other field.