In a speech at the 2010 Investment Adviser Compliance Forum, Elisse Walter, a member of the Securities and Exchange Commission, expressed strong support for the extension of the fiduciary standard for financial professionals, calling it “critical to comprehensive investor protection.”
She went on to express some frustration with the arduous process of addressing the fiduciary standard in the regulatory-reform bills now before Congress, saying: “In trying to determine how it should apply, however, we've been making it too hard on ourselves. The language articulating the [fiduciary] duty doesn't need to be especially complex or legalistic to capture the essence of what we all want it to mean.”
Ms. Walter's comments then took an interesting turn from legislative and regulatory remedies to a grassroots approach, one that was first suggested by Craig Evans Carnick, a certified financial adviser and president of Carnick & Co., a fee-only financial advisory firm.
His idea is for investors to require financial advisers to sign a fiduciary pledge before engaging their services.
I have taken the pledge a step further, to recognize explicitly that in a fiduciary relationship, trustworthy advice is the basis for, not incidental to, product and service recommendations:
THE FIDUCIARY PLEDGE:
“I, the undersigned, pledge to exercise my best efforts always to act in good faith and in the best interests of my client, [insert client's name here], and will act as a fiduciary. I will provide written disclosure, in advance, of any conflicts of interests that could reasonably compromise the impartiality of my advice. Moreover, in advance, I will disclose any and all compensation I will receive as a result of the products and services I provide you, and all fees I pay to others for referring you to me for the products and services I offer you. I recognize that you rely upon me, and are compensating me, for trustworthy advice; therefore, I acknowledge that this pledge covers all the products and services provided in this engagement.”
Ms. Walter concluded that the pledge “capture[s] the essence of the way that all financial professionals should treat investors,” and proposed that we “agree here and move on to the critical issue of harmonizing the way in which our regulatory system treats these financial professionals.”
There is a glaring obstacle to moving on, though.
Although it may seem like an obvious point of agreement to hold all advice-giving professionals to the high standard of a fiduciary, the powerful insurance lobby and less enlightened segments of the broker-dealer community don't see it that way. They are fighting tooth and nail to maintain the status quo, and Congress is suffering from lobbyist-induced paralysis. Instead of acting, the lawmakers may very well decide to order the SEC to study the matter for 18 months.
Ms. Walter directly questioned the need for a study, no doubt recognizing that the SEC has already studied the issue for years, including having commissioned a 2008 study by the Rand Corp. which concluded that investors are confused by the differences between brokers and investment advisers.
Moreover, the onus shouldn't be on investors to demand trustworthy conduct from their advisers.
Can you imagine demanding that your doctor sign a copy of the Hippocratic oath on your first office visit? Of course not.
In true professions, protections are in place to make sure that people who are perceived as trustworthy actually are held accountable to the highest standards of care.
That there are obstacles to implementing a fiduciary pledge, however, doesn't mean the pledge is a bad idea.
On the contrary, it has the potential to open the eyes of investors when they discover that there are advisers who will not sign it.
Advisers who promise to place their clients' best interests first by signing the pledge will be in greater demand than those who won't. That, in turn, will accelerate the exodus of advice-giving representatives from those wirehouses, insurance companies and other financial services firms that won't support them in a fiduciary capacity.
Those firms will ultimately either adapt to the new fiduciary environment or continue to decline in reputation and significance.
It is a shame that we are at the point of looking at gimmicks to ensure that investors can receive trustworthy advice. It is much more difficult to “move on” with the professionalization of investment advice as long as regulators lack the legislated power to enforce the fiduciary standard consistently.
Blaine F. Aikin is chief executive of Fiduciary360 LLC.
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