A consensus is forming that financial regulatory reform should include provisions to require anyone providing advice to adhere to a fiduciary standard of care.
The Washington-based North American Securities Administrators Association has recommended this important change most forcefully and articulately. Commissioners of the Securities and Exchange Commission, President Obama and members of the president's financial team have intimated this position in their public comments. Even the president of the mutual fund industry's principle trade group, Paul Schott Stevens of the Investment Company Institute in Washington, has gone on record in support of having all financial advisers act as fiduciaries.
Anyone not joining the call risks being perceived as placing the interests of financial institutions ahead of those of investors — not a tenable position amid public disgust over Ponzi schemes, excessive executive compensation and bailouts.
Adoption of the fiduciary standard would mean that financial services company representatives who currently are able to provide "incidental" advice as brokers, insurance agents and other types of sales-oriented positions will be required to do more than simply ensure that the products they offer are suitable to their customers' circumstances.
While the suitability standard is essentially a commercial or fair-trade standard that depends on informed decision making by a consumer, a fiduciary standard is a professional standard that requires placing the clients' best interests first, avoidance or mitigation of conflicts of interest, thorough due diligence on products and services, full transparency, and careful monitoring and reporting. Adopting a full fiduciary standard could place financial practitioners in the same category as such classic advisory professions as doctors and lawyers, who are recognized as being trustworthy largely because their positions require competence, procedural prudence and an obligation to place clients' best interests first.
Most of the initial regulatory reform proposals focus on how to fix structural flaws in the financial system: modernizing regulatory oversight of financial products and markets, assuring adequate capitalization of banks and other financial institutions, and finding better methods of assessing and managing systemic risks.
But while repairing the structural integrity of the financial system is necessary, it is not sufficient. The imposition of a fiduciary standard on all those who give financial advice is a cornerstone requirement of regulatory reform because it focuses directly upon the integrity of relationships between investors and the financial services providers they rely on to act faithfully on their behalf.
The transition to a full fiduciary standard has its hurdles. It places more demands upon employers to train and supervise advisers. Advisers are also subject to greater litigation risk because, by definition, higher standards are harder to maintain consistently. Moreover, there are uncomfortable implications of the change for some key players in the financial services industry. Executives of financial services companies owe a fiduciary duty to the shareholders of their companies, rather than to the investors who use their products and services.
I am concerned that, in light of these hurdles, some segments of the financial services industry will work behind the scenes to lower the bar, without being perceived as being opposed to doing what is best for investors.
The Certified Financial Planner Board of Standards Inc. in Washington embraced the concept that financial planners should be held to a fiduciary standard "as defined by the Board." A best-practices task force of the Denver-based Financial Planning Association asserted that those doing
financial planning should acknowledge fiduciary status — as defined by the CFP Board — but it did not endorse overt disclosure of those circumstances in which a CFP does not intend to assume fiduciary status.
Industry trade group statements seem to focus upon wanting advisers to "act as" fiduciaries. Why not acknowledge them as "being" fiduciaries?
Given the depth and breadth of the financial crisis, and the collapse of investor
trust, progress toward full fiduciary status for all advisers isn't enough. The administration, legislators, regulators, financial services companies and professional organizations should be clear in their support for a fiduciary standard.
Blaine F. Aikin is president and chief executive of Fiduciary360 LP in Sewickley, Pa.
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