Fiduciary foes are spitting into the wind

New regulations aside, megatrends will demand that advisers align themselves with clients

Apr 10, 2015 @ 11:07 am

By Blaine F. Aikin

Worried that new fiduciary rules from the Department of Labor and the Securities and Exchange Commission will disrupt your business? Why?

All that the new regulations would do is codify what the megatrends of capitalism, technology and social values have already started. If your business is built on the ability to provide personalized advice without adherence to fiduciary obligations, then your model is outdated.

Even if the new rules don't get implemented, or are watered down to the point of ineffectiveness through the political or legal maneuvering of fiduciary foes, the era of advice without fiduciary accountability is rapidly drawing to a close, and the end will come with or without new regulations.

In a guest editorial in the May/June 2014 edition of the Financial Analysts Journal, “A New Era of Fiduciary Capitalism: Let's Hope So,” the president and chief executive of the CFA Institute, John Rogers, explained, “In fiduciary capitalism, the dominant players in capital formation are institutional asset owners; these investors are legally bound to a duty of care and loyalty and must place the needs of their beneficiaries above all other considerations. The main players in this group are pension funds, endowments, foundations and sovereign wealth funds.”

Mr. Rogers cited three forces at work in this new capitalism. First is the huge and growing size of institutional investing power, with the top 1,000 institutional fiduciaries worldwide holding more than half ($25 trillion) of global equity market value. This represents a shift in power from sell-side financial product providers to buy-side institutions.

Second: technology. “For decades, brokers and investment bankers enjoyed an asymmetric information advantage over the institutional asset owners they did business with,” Mr. Rogers said. “That information gap is mostly gone now.”

Third: agendas. “To many fiduciaries, things like market outperformance, an information 'edge,' trading, flow and league tables are not particularly important,” Mr. Rogers said. “The only thing that really matters to these investors is delivering the returns that are uniquely required by their ultimate beneficiaries.” With ultra-long-term time horizons and high cost and conflict sensitivity, these behemoth investors have the clout to force fiduciary-friendly conduct from their sell-side counterparts.

Another must-read guide to understanding the new investment paradigm is a compelling 80-page report from KPMG, “Investing in the Future.” It is packed with insights about four megatrends that will reshape the investment industry over the next 15 years. The four trends are demographics; technology; the environment; and social values, behavior and ethics.


The two megatrends with the greatest expected impact on standards of conduct for investment advisers are technology and social values, with these trends being closely intertwined. The pace of technological innovation, coupled with the fact that technology is ubiquitous in virtually every aspect of life and connects the global population, makes it a megatrend.

Under the heading of social values, the report notes: “Increasingly, people are trusting 'people like me' rather than corporations or professionals and, as such, word-of-mouth and viral messages are becoming more powerful than traditional advertising. Trust is increasingly binary in nature. It is given instinctively but can be removed immediately if abused. This poses a particular challenge for the financial services industry, in which trust remains at an all-time low.”

In an interview published in the March/April 2015 issue of CFA Institute Magazine, Tom Brown, global head of investment management at KPMG, spoke of the new “trust paradigm” and explained: “The ways that the industry can start earning that trust revolve around a focus on simplicity and transparency, as well as actually delivering on the customer service promise.”

It's imperative, according to Mr. Brown, for financial institutions to get closer to clients. Advisers must understand that to be close, they need to be operating under a business model that puts them on the same side of the table with their clients.

Those who are fighting for a “right” to continue to disguise sales activities as advice are spitting into the winds of change. The bygone era that offered advantages to sales-centric businesses was based on conditions that no longer exist or will soon disappear.

Blaine F. Aikin is president and chief executive of fi360 Inc.


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