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7 reasons why financial stewardship is more valuable than a fiduciary standard

A different approach to defining a higher professional standard of care for advisers

Jul 15, 2015 @ 1:53 pm

By Don Trone, Mary Lou Wattman and Steve Branham

With the recent release of the Labor Department's re-proposed fiduciary definition, a lot of fiduciary advocates are concerned that “fiduciary” will become a de-minimus standard. It will become a floor, not a ceiling — a bronze, not a gold standard.

For those who have been involved with the fiduciary movement, “fiduciary” has been more about defining a professional standard than a legal standard. It was a way for elite advisers to differentiate themselves in the marketplace.

Now that we have seen how a regulator can maul the word “fiduciary,” we think there's a better approach: define a higher professional standard of care. In this case, stewardship.

(Related read: 7 signs the fiduciary movement is ending)

Here are 7 reasons why being a financial steward is superior to an investment fiduciary:

1. The heart: A financial steward is a person who has the passion and discipline to protect the long-term interests of others. By comparison, an investment fiduciary merely has to demonstrate that the best interest of the client comes first. Of the two definitions, which evokes a higher sense of purpose?

2. Purpose: A financial steward is committed to being a point of inspiration for moral, ethical and prudent decision-making. An investment fiduciary can be uninspiring in any number of aspects and still serve as a fiduciary.

3. Character: A financial steward, by definition, is regarded as a person of good character. An investment adviser can be a dirt bag and still meet the legal requirements of a fiduciary.

4. Competence: A financial steward must be able to judge wisely and objectively. This only comes from years of experience and additional training. If regulators attempt to subject all advisers to a uniform fiduciary standard, such a standard will have to be written so that even new advisers to the industry can qualify. There's a big difference between being qualified and being competent.

5. Courage: Oftentimes, a financial steward will have to stand alone to speak out when others are willing to turn a blind eye to unethical or illegal behavior. A fiduciary only has a duty to protect the best interests of a client; that duty does not extend to others who are not clients.

6. Purview: Financial stewardship is a voluntary standard that is not subject to legal or regulatory oversight. Unlike fiduciary, we don't have to wait for regulators to define the standard of care for a financial steward.

7. The head: Clients love stewardship; they flake out on fiduciary. Complex communications - such as the concept of fiduciary responsibility - are processed in the neo-cortex portion of the brain. Love, passion, trust and security — all emotions associated with stewardship — are processed in the limbic portion of the brain. The limbic also happens to be where the happy hormones — oxytocin, serotonin and dopamine — are produced.

(More insight: DOL fiduciary efforts fail by only focusing on fees and expenses)

If regulators take the route of defining a de-minimus fiduciary standard of care, all is not lost from the fiduciary movement. We can still incorporate the best practices that have been developed over the last 30 years to define the attributes and qualities of a financial steward.

Don Trone, Mary Lou Wattman and Steve Branham, are the co-founders of 3ethos, whose research and training programs are focused on the intersection between leadership, stewardship and governance.

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