The FIDUCIARY STANDARD DEBATE

The hottest debate in the financial services industry is which standard should be adopted when dealing with clients and their finances- the fiduciary standard, the suitability standard or some hybrid of both. Everyone from the White House to every oversight organization, every financial magazine, newspaper and every financial advisor or industry expert, famous and not so famous, have expressed their opinion on this passionate subject. Ironically, the only groups we haven’t heard from are the big broker/dealers.

Now this Investment Advisor is throwing his hat into the ring, offering his opinion from a philosophical/moral point of view. The industry is at a crossroads; do we have the ethical fortitude to treat our clients with the same high regard that other industries do?

Let’s review; The Fiduciary Standard requires that the advisor put their client’s interests ahead of their own, their firm, commission, or product. An RIA or Registered Investment Advisor must follow this standard the “Trust” standard, the highest known in law, and fulfill critical fiduciary duties of trust and confidence and must provide its best advice.

In contrast, The Suitability Standard does not require a Financial Advisor to place the interests of its clients ahead of its own, their firm, commission or product. This is commonly known as a “sales- oriented” or non-fiduciary Financial Advisor. Even if a non-fiduciary Financial Advisor wanted to follow the trust standard and become a fiduciary to its clients, it cannot do so because of the contract it has with the Broker/Dealer. Such contracts require the Financial Advisor to place the interests of the Broker/Dealer before the interest of the client. In other words, if a client “qualifies” for an investment, the Financial Advisor can sell it to them while ignoring the “Know your client” rule. This means that a Financial Advisor can make recommendations and sell products based on which ones pay the highest commission.

Unfortunately, most clients and the public at large don’t have a clue that standards exist, let alone the difference between a Fiduciary Standard and a Suitability Standard.

In the medical profession, the Hippocratic Oath is taken by doctors, swearing them to ethical practices of medicine. Most people know that doctors are held to a higher standard, so why shouldn’t Financial Advisors be held to a higher standard that the public is well aware of. Would you accept a doctor to take care of your health who had a lesser standard? Of course not, so why would you accept a Financial Advisor with a lesser standard to take care of your financial health? Most people in their right mind wouldn’t, but as I previously stated most people just aren’t aware or informed that there is a dual standard in our industry.

I believe that to solve this problem the industry has to first start changing the way it hires its financial advisors. Can anybody be a doctor? Of course not, if it was easy everybody would do it. So should be the same with the way Financial Advisors are hired and trained. The norm today among the large broker/dealers is to hire a lot of advisors, get them to pass their licenses, provide basic training, and then make them essentially sales people/order takers to bring in the required amount of AUM in the stated amount of time. “Don’t worry about investing the client’s money, we have experts who will take care of that”. Not that there is anything wrong with delegating those duties, but you still have to know how to manage the money managers if your not doing it yourself. A football coach manages his players and knows when one of them is underperforming he is ready to pull him out and send in another replacement.
Here’s what we can do- start by hiring fewer new Advisors. Next, in addition to the licenses currently required, introduce a new Fiduciary/Ethical license that’s a requirement not only in the financial services industry, but in other industries as well such as; mortgage lending, banking, real estate, insurance, etc. Spend more money on intensifying the training including how to “manage” money. Then place them with a seasoned Advisor or team to mentor them. Finally, they all should be Fiduciaries. Anything less is a disgrace to our industry and our clients.

Even now the Fiduciary Standard is not much defined beyond “your best interest will come first”. Even if you claim to be a Fiduciary in name, you have to actually perform like a functional fiduciary. We need high standards, not watered down ones. We need to be the stewards of our client’s money, and we need to be transparent, driven by a code of ethics and principles and a standard of professional conduct that makes us accountable.

Whether your fee based or commissioned, selling one product line or many, you still can be a fiduciary to your client.
Just for a moment imagine if all the people who were involved in selling mortgages during the real estate boom had took the time to know their client, explained the pitfalls of the mortgage they were seeking and had held their lending requirements high, they would have made fewer sales, but they may have helped avoid or dampened the housing collapse.
With the spotlight on the financial industry right now, we have an opportunity to show the public we are capable of doing the right thing. Proactively, we can adopt a single higher standard for the industry and educate the public to accept only this standard.

By monitoring and legislating from within, we can demonstrate to the public that our industry possesses the integrity and discipline to put the client’s best interest ahead of its own.