From the January 2009 issue of Investment Advisor • Subscribe!

Fixing Fiduciary Failings

The Retirement Advisor Profile

The advisor: Blaine Aiken

The firm: fi360

The Web site: www.fi360.com

The approach: Promoting the fiduciary standard worldwide, and educating companies and individuals as to their fiduciary responsibilities

The financial servicesworld may finally be catching up with the fiduciary standards that Blaine Aiken has been espousing for years. With new fiduciary expectations from the Department of Labor for advisors who provide services to clients with retirement savings accounts to kick in under DOL rules implementing provisions of the Pension Protection Act this month, clarity on who is a fiduciary and why it matters is paramount.

Aiken is CEO of fi360, a Pittsburgh-area based firm that offers education and management support for the investment fiduciary profession. On a global scale, fiduciary lapses have played a large part in the current economic crisis, Aiken asserts, with an entire web of professionals failing to fulfill their fiduciary roles. "Some of the firms did not take their roles as they should have...it's a relationship of trust. You enter into a fiduciary [relationship] in a number of ways."

The fiduciary lapses Aiken lists include inadequate attention to the risk of the products themselves; a lack of product transparency; the extent of bundling of mortgage loans by the firms doing the bundling; and the inadequate understanding of the products involved--and their fiduciary responsibilities--by the banking and mortgage industry's managers and executives.

Aiken goes so far as to note that Treasury Secretary Henry Paulson was perhaps "not acting as fiduciary, either, with the bank and insurance giants' bailouts. He has a duty to the citizens of the United States," but the bailout(s) have first and foremost looked at "stabilizing the financial services industry," Aiken says. However, he argues, "the mission of civil servant is to serve the citizens."

As the advisory profession knows, the Department of Labor will be demanding that plan service providers meet a fiduciary standard and disclose all conflicts of interest and compensation they receive if they are in a position to give advice to clients.

Title six, Section 601 of the Pension Protection Act, "lets the broker/dealer community in more broadly to provide more advice, but they must act as fiduciary and jump through all the conflict-of-interest hoops," Aiken notes. "I think the broker/dealer community is going to wake up and say, 'Why jump through?'"

Aiken expects a "massive simplification of how the financial services world operates."

As to the landscape of advisors and broker/dealers, Aiken believes that with the emphasis on the fiduciary role, the "classic broker/dealer model cannot survive."

The DOL has come out with a very significant set of rules to let a broader array of potential advice givers into the arena, he notes. Then there are the safe harbor carve-outs to protect the use of service providers to retirement plans. An agreement with a service provider must be in writing so the plan fiduciary can assess whether the arrangement is reasonable. However, even when the service providers meet these very rigorous rules meant to manage conflicts, disclose non-level compensation, submit to extensive disclosures, and undergo verification of advice through an annual audit, there remain issues, Aiken says.

Soon, the broker/dealer will ask, "Is there a better way?" according to Aiken. And that way may be to just accept a new model and go fee-level in terms of compensation, he says. "That's what I think--the financial services community is going to have to come to that conclusion," he says of the fee-level choice, with "a more principled-driven approach of professional advice. You don't have to incur expenses if you don't have conflicts of interest, and adhere to fiduciary levels. You are not managing conflicts of interest--you are avoiding them."

"So to me, a lot of what is going on now by Congress, the DOL, and the marketplace is an attempt to turn the financial services industry into more of a financial services profession. I think that is a huge shift," says Aiken. He has varied experience through the past few decades in financial planning and creating and defining the fiduciary responsibility for planners and advisors and other service providers to retirement plans.

According to Aiken, DOL and Congress are saying, "Look, if you have a process for selecting your service providers, we will give you some protection for using them. For service providers, if you omit material information, you have to be held accountable for that. There are much higher expectations of transparency and disclosure going forward."


Elizabeth D. Festa is a freelance business writer based in Washington, D.C. She can be reached by e-mail at elizabeth.d.festa@comcast.net.

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