Executive Summary
In recent years, the financial planning profession has been focused on the development of a fiduciary standard for financial advice, to protect the public from the harm done by those who claim to act in their clients’ best interests but actually make recommendations to benefit themselves. However, the reality is that the recent challenges of fiduciary have extended beyond just the delivery of financial advice; since the financial crisis of 2008, the issue has also extended to the duty that Wall Street investment banks owed to those they sold securities to (even when the company “knew” the investments were dogs at best, or at worst actually bet again their customers for profit). Other fiduciary concerns that preceded the financial crisis have also been highlighted in recent years, such as the obligation of investment managers to vote the proxies for stocks they hold in the interests of shareholders. The good news in all of this is that the public backlash against a wide range of damages the financial system and corporations have inflicted upon the public is raising the focus on fiduciary simultaneously across multiple channels. The bad news is that the fact the fiduciary is so wide in scope appears to be making it extremely difficult to implement with practical regulation.
The inspiration for today’s blog post comes from a tribute to Vanguard founder Jack Bogle that I attended yesterday in New York City at the Museum of Modern Finance (actually located on Wall Street), hosted by the Institute for the Fiduciary Standard. Amidst a star-studded lineup that included former Federal Reserve chairman Paul Volcker, former SEC chairs Arthur Levitt, Harvey Pitt, and David Ruder, Yale professor Roger Ibbotson and Chief Investment Officer David Swensen, Princeton professors Alan Blinder and Burton Malkiel, and more, the event was organized to recognize the lifetime contributions of Bogle, from his creation of Vanguard Funds and the first index fund, to his long-time advocacy for acting in the interests of consumers and a fiduciary focus.
In listening to the discussions – especially an active conversation between former SEC chairs Arthur Levitt, Harvey Pitt, David Ruder, and SIFMA President Tim Ryan – I was struck by the complexity of the regulatory challenge that is “implementing a fiduciary standard.” In the advisory world, I think we sometimes view the issue with a relatively simplistic lens – “just do the right thing for your client already!” – and forget the practical challenges that really arise when, as a regulator, you’re trying to write rules that can be realistically enforced, while impacting a wide swath of companies, who operate different business models, serve different functions in the economy and marketplace.
For instance, while many advisors distribute financial services products in combination with delivering advice, many really do “just” sell products, and there is unquestionably a public need for people to purchase some types of basic financial services products without any desire to receive, or pay for, advice. Accordingly, while I have long advocated for the imposition of a fiduciary standard on the delivery of advice, while allowing those who simply sell products to avoid the standard (as long as they commit to NOT delivering advice or holding themselves out as an advisor), the discussion amongst former regulatory chiefs made it clear that although there is some consistency in view about the goal to be achieved, the means of doing has far less consensus; some very smart and well-intentioned people can still have significant disagreements about the “best” way to implement consumer protection.
And tied to this discussion is the harder question of hwere exactly you draw the line between securities and “product” distribution versus advice. Certainly, some level of trading and product distribution in the market is crucial. In fact, as Bogle himself highlighted, one of the primary functions of the financial system should be to help direct capital to its highest and best use – for instance, helping those who have capital to invest get access to public issuances of equity or debt for companies seeking to raise capital. It’s difficult to imagine a world where a risky company is expected to simultaneously serve the company and its existing shareholders to raise capital, while acting in a fiduciary interest to its prospective new shareholders while also trying to persuade them to become investors. In other words, there really are situations where the fiduciary standard is neither reasonable, nor necessarily appropriate, and the focus instead is on minimizing fraud and maximizing disclosure within appropriate limits. But if personal financial advice to an individual consumer is at one end of the spectrum, and distribution of an IPO or bond offering for a company coming to market is at the other end of the spectrum, where exactly should you draw the fiduciary line? We as financial planners are adamant that we should be on the fiduciary side of the line, but the regulators have a much more difficult challenge – where to put the line, and how to enforce each side of the divide that the line creates.
The fiduciary discussion also raises the question of just how far the standard should extend. For instance, many planning and investment management firms I know are adamant about the importance of the fiduciary standard as it extends to the advice that they deliver their clients. Yet many of those same firms who manage investments on behalf of their clients do not routinely do a proactive analysis of the proxy votes for the securities held on behalf of those clients (not to mention actually voting the proxies in the first place). Yet as Bogle and so-called “pay czar” Kenneth Feinberg pointed out, the failure of investment managers and institutions to regularly vote their proxies has allowed a wide range of corporate governance problems to persist, from inactive boards that let a company run wild to boards that set unreasonable compensation and incentive arrangements for their CEOs and then wonder what happened when the company got off track. If you’re willing to advocate for a universal fiduciary standard as it applies to advice, are you also willing to do the research necessary to handle proxy voting for all of your clients’ investments?
So what do you think? Just how broadly should the fiduciary standard apply? How broadly can it be effectively enforced? What other aspects of fiduciary impacts financial planners beyond the raw delivery of financial advice itself? Are we as planners prepared to face all aspects of fiduciary (e.g., proxy voting), and not just regarding advice itself?
Interesting writing as always. What I’ve struggled to find is some concrete examples of what it truly means in practice to be a fiduciary. For example, if it is determined that an annuity is appropriate for the client portfolio, how do we make the recommendation and prove that it is in the client’s best interest. There are so many different products and strategies out there. Have you read anything that provides a framework for meeting the fiduciary standard? I’ve only seen broad definitions that are open for much interpretation.
If you sell products from which you or company will benefit, you are a salesman and should identify yourself as such. If in that same transaction you make any additional claims, such as general financial advice, you have then crossed into a restricted area governed by the investment advisors act and should then have a fiduciary duty applied to that transaction.
We would never allow a non-physician pharmaceutical salesman to legally start rendering ‘medical advice’ as part of his sales process; but somehow it’s ok to allow a financial services product salesman to render ‘financial advice’ and yet somehow sidestep his legal responsibility for that advice?
In the financial services industry we need a simple salesman’s rule; IF you identify yourself and/or your services as anything but that of salesman THEN the fiduciary rule as outlined in the investment advisors act applies to you and your master, the company for which you are under contract with. Simple and easily understood, if you are selling products you are a salesman.
Bob Stanley