The question du jour is whether the same philosophy of promoting consumer education and more individual responsibility also works for applying the fiduciary standard. More than differences of registration or even compensation, opposing views of how to apply the standard–to manage conflicts in the investors’ best interest–are fast becoming a central line of demarcation, separating interested groups.
On one side is a broad coalition of groups and interests, whose adherents range from unabashed free-market champions to equally unabashed “big government” regulators. While disagreeing on many regulatory policies, they still seem to share a fundamental premise. The premise, viewed through a free-market lens, is that the “problem” (with the financial system regulatory structure), is consumers. Consumers who behave badly or irrationally, that is. The solution is, invariably, making consumers responsible via consumer education and (you guessed it), still more disclosures.
On the other side is a similarly diverse group of economic conservatives and liberals whose fiduciary lens focuses on the responsibilities of the advisor as much as (or more than), on the responsibilities of the consumer. Their reason is at the heart of what’s different about a relationship based on trust (a fiduciary relationship), as opposed to a transaction based on commercial fair dealing.
Fiduciary status exists in law to mitigate the unlevel playing field or the “knowledge gap” between the professional (lawyer, doctor, investment advisor), whose expertise is deemed inherently vital to the consumer. The Tully Report noted this gap between registered representatives and investors: “RRs and their clients are separated by a wide gap of knowledge–knowledge of the technical and financial management aspects of investing… It is a rare client who truly understands the risks and market behaviors of his or her investments.”
With such a gap between the knowledge, experience and skills of the parties, a “relationship of trust” necessarily makes the consumer reliant on the professional’s judgment; the importance of the duties of loyalty, care, and good faith are evident. It is this inherent reliance on–and trust in–their vital professional advice that legally distinguishes our relationship with, and the responsibilities of, our lawyer, doctor and investment advisor, from the responsibilities of, and our commercial contacts with, our butcher, car dealer, Verizon store rep, or restaurant owner. In commercial contacts, there is a presumed level playing field, caveat emptor reigns, and “disclosures” can be an effective tool.