John Bogle on fiduciary standard: ‘No man can have two masters'

Host of marquee names back call for applying fiduciary standard to all advisers

Mar 19, 2010 @ 4:23 pm

By Dan Jamieson

Several of the dozen signatories to a statement released this week by The Committee for the Fiduciary Standard, which called for a fiduciary duty for all advisers, told InvestmentNews that such a standard is crucial to protect investors — but it's also critical for protecting the financial planning profession.

"As the good book says, no man can have two masters," said John Bogle, founder of The Vanguard Group Inc.

Mr. Bogle's sentiment has been echoed by other investment and academic luminaries in the last week. "There is massive evidence that many consumers in the financial markets are easy prey to conflicted advisers," Daniel Kahneman, a professor of psychology at Princeton University and a Nobel laureate, wrote in an e-mail.

"If the fiduciary standard makes advisers more cautious about serving the client's interests, I see that as a plus," Mr. Kahneman asserted. And personal-finance columnist Jane Bryant Quinn also noted that such a standard is a necessity to protect investors. "People who go to financial advisers — and advisers are calling themselves by that [name] — should expect the same fiduciary care from all of them," Ms. Quinn said.

Their comments were in anticipation that the revised financial-reform package unveiled by Sen. Christopher Dodd, D-Conn., would not include an earlier provision that would have required a fiduciary standard.

"Although one would have hoped that advisers do not need a law to tell them to act in the best interest of their clients, many advisors have abused their privilege, so this standard seems appropriate," Richard Thaler, professor of behavioral science and economics at The University of Chicago, wrote in an email.

"The problem is that well-meaning people can behave terribly," said Dan Ariely, professor of behavioral economics at Duke University.

"The question then is, where are people being tempted in the current system, and what professional standards do we want to put in?"

A uniform fiduciary duty could also be "a way of unifying the profession" and improving the financial advisory industry's image, said Don Phillips, managing director at Morningstar Inc.

"We've come so far from the commission-driven days of two decades ago, this is a way to keep the pressure on, to keep aiming higher," he said.

A fiduciary duty "is not a panacea by any means, though," Mr. Phillips said. "It's not as if one side has all the moral high ground."

Mr. Bogle said that mutual funds should have clearer fiduciary obligations as well.

"Three quarters [of fund companies] are owned by large financial conglomerates or public shareholders, [so] they have two different sets of [fiduciary] duties," he said — one to shareholders and the other to their owners.

The committee's fiduciary statement was also signed by Roger Ibbotson, chairman of Zebra Capital Management LLC; Cliff Asness, managing principal at AQR Capital Management LLC; John Markese, president of the American Association of Individual Investors; V. Daniel Radford, vice president at Ullico Investment Co., a unit of Ullico Inc., and a former Federal Reserve governor; Terry Savage, a syndicated financial columnist for the Chicago Sun-Times; and another Nobel laureate, George Akerlof, professor of economics at the University of California, Berkeley.

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