Other Voices

It will take a profession to enhance standards

Jul 20, 2014 @ 12:01 am

By Knut A. Rostad and Mary A. Malgoire

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The Dodd-Frank law was enacted just four years ago in the backdrop of a crisis — a crisis some observers say came perilously close to the collapse of the financial system. Nonetheless, federal rule making from the Department of Labor or the Securities and Exchange Commission that fulfills the requirements of Dodd-Frank and affirms true fiduciary principles and practices now appears unlikely.

Rule-making efforts are already being smothered by opposition from the insurance and securities industries. The sad result is that Dodd-Frank may produce an environment that harms investors, as well as the capital markets.

It's time for advisers who seek to advance the profession of fiduciary advice to accept this situation. Accept that the prospect of any meaningful fiduciary rule making is over, at least for now. Accept that the fiduciary standard has been bludgeoned both in Washington and the public square.

We need to move on and adopt a market-driven strategy to promote fiduciary principles and practices. Only true fiduciary advisers can lead this effort. The starting point: a vision of a vibrant profession that is coupled with a practical business plan. In a phrase, we must lead.


We can't forge a fiduciary standard without a collective passion and identity as a profession. As Robert Kennedy, chair of the Catholic Studies Program at the University of St. Thomas, wrote in “Enron and World Finance — A Case Study in Ethics” (Palgrave Macmillan, 2006), “Society depends on professionals to provide reliable fixed standards (of health, of justice, of truth) in situations where the facts are murky or temptations too strong. Their principle contribution is an ability to bring sound judgment to bear on these situations ... Modern society, in many important ways, is the product of professional activity.”

A widely referenced article from the Journal of Financial Planning on this subject is Richard B. Wagner's “To Think ... Like a CFP.” Mr. Wagner wrote that while all professions must work with ambiguity, they involve “the conviction of divine influence, an altruistic motive, a strong ethical context, intense academic preparation, an esoteric common body of knowledge and an educational curriculum.”

What is not a profession? He cites life insurance sales, securities sales, tax planning and banking as “sales and functions” rather than professions.

Mr. Wagner is blunt, if not scathing, in his criticism of certain practices of CFPs and financial planners. “What a shame that we ever allowed ourselves to be used as a tax-shelter delivery system or to be defined in terms of our ability to place an individual with the right financial product,” he writes.

Still, Mr. Wagner is upbeat. “We should be proud. No other profession has carved a niche where none existed, as we have done. No other profession has to battle entrenched special interests of unprecedented power to merely gain purpose, as we have done.”

Crafting and upholding standards, codes of conduct and best practices is difficult but not so daunting as to be an impossible dream. Mr. Kennedy's analysis of true professionals finds they should make good judgments amid uncertainty and that they require not just knowledge and experience but also character and moral integrity.

The essential fiduciary obligations of loyalty, due care and utmost good faith are well outlined through common law and regulatory rule making and guidance. Simply, advice must be solely in the best interest of the client as opposed to that of advisers or their firm, or a third party.


The causal relationship between diminished fiduciary conduct and rampant investor distrust is as obvious as a black eye but is ignored industrywide. According to InvestmentNews' reporting on State Street's 2013 Forgotten Investor Survey, just 15% of the respondents reported trusting their adviser. Industry consultant Chip Roame goes further, saying at the 2012 Tiburon Summit that the public believes “the whole industry is evil. ... You are lumped in with Madoff.”

Another potent example of the problem was witnessed during a panel at Ron Carson's 2013 Peak Adviser Alliance conference, when consultant Michael Maslansky brought investors on stage to react to a series of recorded adviser pitches. In an interview afterward, WealthManagement.com editor David Armstrong, a panelist, said, “The way advisers talked about how they were paid — belaboring the concepts of "fees' and "fiduciary mandates' — made it seem as though they had something to hide. ... What the clients wanted ... was a number. How much do I pay you? Who else pays you?”

Mr. Maslansky added: “Every second you talk about fees and don't give a number, it becomes that much more important.”

Robert Fronk underscores this point. The author of the Harris Reputation Quotient Survey measures corporate reputations. In 2013, large financial service companies ranked near the bottom. Mr. Fronk said, “One thing the public is screaming loud and clear about financial services is, "Be more sincere, be more honest, be more transparent.' “

For advisers and brokers, there may be no more important illustration of where we fall short than in clear reporting of total fees and costs. Significant anecdotal and research evidence suggests that many investors have no clue what they pay for advisory services, much less the costs associated with the underlying investment vehicles.

While investors themselves may be at fault for not demanding their broker or adviser provide detailed quarterly accounting reports (or good faith estimates where necessary), the profession must also share responsibility for not voluntarily doing so.

We should disclose the material facts (including the specific dollar amounts) of a transaction not to score points with clients but because we recognize that all interests are served when we proactively discuss and report the entire value proposition. We are hard-pressed to think of any other industry or group of service providers where so much opacity continues to exist. (We are working on a future article that will discuss how the leading organizations in the advice industry are responding to these issues.)


Essential criteria for the principles and practices of a profession of fiduciary advice can be divided between the “hard” requisites such as education, knowledge and experience, and the “soft,” including communication, character, honesty and transparency. While both sets of criteria are essential, advisers and their membership organizations place far greater emphasis on hard criteria.

Clear and concise external communications; conduct based on honesty, integrity and courage; and simple transparency too often are missing. Make no mistake, the deficit in that third leg of fiduciary obligations — utmost good faith — has contributed mightily to lingering investor distrust, and is toxic to the adviser-client relationship as well as to the development of a profession.

For the advice industry, no other issue demands as much attention as this: Should a financial intermediary providing advice be required to be a fiduciary? And if so, what should fiduciary duties entail?

Two overriding dynamics should — but do not — offer guidance. The first is that most brokers (who by law are not generally required to be fiduciaries) already hold themselves out as fiduciary advisers, claiming they put their clients' best interests first. The second is that the vast majority of investors believe that their broker's product recommendations constitute fiduciary advice.

That there is widespread and well-documented investor misconception (and resulting harm) is no surprise. What is surprising is that, despite objections from consumer and adviser groups, many regulators tacitly accept this duplicity. Worse yet, the advisory profession either doesn't know what to do or — and this would be even more amazing — isn't concerned.

Knut A. Rostad is president and founder of The Institute for the Fiduciary Standard (thefiduciaryinstitute .org). He can be reached at kar@rpjadvisors.com.

Mary A. Malgoire is a certified financial planner and a founder of the National Association of Personal Financial Advisors and was a practicing financial planner for nearly 30 years. She can be reached at mary.fiduciary@gmail.com.


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