Fiduciary Debate: It's a Question of Trust

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My Jan. 16 AdvisorOne blog (Fiduciary Debate: What if Doctors Could Act Like Advisors) received many good comments that warrant responses which I didn’t get a chance to address in last week’s blog. So, here’s my take on some of your thoughts, and sorry for the delay. 

“Anon” posted a couple of comments that got right to the heart of the fiduciary issue. The first is: “Smart regulation goes after the reason people are misbehaving (i.e. the huge financial incentive to recommend bad products) rather than just tell people to stop misbehaving (i.e. fiduciary rule).”

Too true. Yet even though the incentives are perhaps greatest in financial services, all professions wrestle with financial conflicts of interest: surgeons make a lot more when they operate than when they don’t, dentists do better with root canals than annual cleanings, and lawyers often double their already conflicted hourly rates if you wind up in court. The difference is that these conflicts are readily apparent to most patients/clients, who can ask pointed questions about the need for these services and/or get a second opinion if they want further confirmation.

When it comes to financial advice, the various sources of advisory compensation are often obscured, making informed consent almost impossible for most clients. Requiring all retail “financial advisors” to act in the best interest of their clients (as we already do with RIAs), and providing for legal recourse when they don’t, seems like a reasonable and workable step in the right direction. However, it’s also hard to argue with Anon’s solution, too: 

“For commission advisors that want respect: stop telling clients you work for free, or evade the fee question by saying product providers pay for your services. Whatever you make in commissions must come out of client savings, and people deserve to know exactly what that figure is. True professionals can be honest about their fees because they're providing greater value. If you think you're providing great value then start acting like a professional. The problem is that they're able to completely misrepresent themselves as 'cheaper' than fee-only because they're able to hide so much of their cost from their clients. Regulators could fix it by either demanding transparency (let people see the size of the kickbacks involved), or just ban commissions—as they're doing in the UK, Australia and the Netherlands.” 

Edward Blake Mendez pointed out that the securities industry’s resistance to a universal fiduciary standard is further eroding trust in advisors, which was already at a low we haven’t seen since the tax shelter/limited partnership collapse of the mid-1980s: “Our fiduciary dialogue should focus on the client's best interests, not just personal financial losses or additional costs imposed by fee-only practices. Why do our industry public figures abhorrently bristle about the fiduciary idea, perceptibly admitting guilt in the public's eye?” 

He then goes on to acknowledge the limitations of any standard: “The fiduciary standard cannot, in of itself, control future criminals' activities and poorly addresses our civilization's human greed sickness. We as providers must buck up and take a stand against corruption in our financial services industry.” 

Couldn’t have said it better myself.

As I mentioned, both of these commenters found the heart of the fiduciary matter: Financial advice—and all of financial services—is based on client trust. That trust has been eroded lately both by the Mortgage Meltdown and by the growing media coverage and public awareness that many “financial advisors” not only aren’t required to act in their clients’ best interests, legally they don’t even work for their “clients.”

To regain the public’s trust—and survive—the financial services industry is going to have to morph into a model that distributes products and services through professional, fiduciary advisors. 

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