Editor’s Note: This article is an expanded version of a blog the author published on LifeHealthPro in February 2013, titled A uniform fiduciary standard won’t change anything
A uniform fiduciary standard won’t change anything if we don’t fix some of the underlying problems plaguing the industry.
Let me start by saying that you can’t impose morality and ethical behavior through legislation. An industry centered on money will always attract criminal activity. However, change is coming in the financial services industry, and it’s coming in the form of a fiduciary standard. Unfortunately, those who wish to take advantage of others for personal gain, by nature, do not follow the rules. Therefore, any additional legislation or rules attempting to enforce moral character, in my opinion, will not work. Don’t get me wrong; I think change is necessary in the financial services industry, but there must be a better way.
I believe it is every financial professional’s moral responsibility to put the clients’ interests ahead of their own, with no exceptions. With that said, I understand that does not always happen.
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To fix the problem as an industry, I feel we need to focus on three key areas:
- Better enforcement of existing regulations,
- Improved communication to investors, and
- Financial literacy and education.
Better enforcement of existing regulations
Taking into consideration my statement above, the debate for a uniform fiduciary standard is flawed. Given the current model, registered investment advisors (RIAs) are regulated by the SEC (primarily under the Investment Advisers Act of 1940). They’re the only type of advisor held to a fiduciary standard and are legally required to work in their clients’ best interest. Essentially this means all other advisors have a moral (but not legal) responsibility to work in the clients’ best interest.
I personally feel that the SEC and FINRA are ill-equipped to provide the necessary level of enforcement required if all financial advisors are fiduciaries. Given the rampant cases of investor fraud across the country, I see no end in sight, with nominal punishments for bad behavior.
For example, I recently read an article that mentioned an advisor receiving a $5,000 fine and one-month suspension for cheating on his continuing education (CE) courses. Will that punishment curb the behavior in the future? I doubt it. Cheating is the result of someone’s conscious decision to break the rules. It’s a mindset. Once the line is crossed, what’s to stop that person from doing it again, this time on a larger scale? In this instance, after one month, the advisor can begin to solicit business and work with clients to manage their money again. Would you want someone who has cheated in the past to manage your money? I know I wouldn’t.
In addition, NBC News published an article last year titled “Too Big to Fail Means Too Big for Jail,” which discussed a money-laundering case involving one of the world’s largest banks. The bank was forced to pay $1.9 billion dollars (accounting for only six weeks of the bank’s profits), and not one member of the bank received jail time for his or her part in the string of illegal activities.
The inability to regulate the large banking institutions only perpetuates the trickle-down behaviors that permit fraud and misconduct at the advisor level, which ultimately impacts the average investor. Now, this case had nothing to do with the average investor. However, it paints a gloomy picture of the level of enforcement on existing regulations. As the media clearly points out via the regular flow of articles on advisor misconduct, the current punishments are not curbing the behaviors. I’m an advocate for more substantial and strict punishments for misconduct and illegal activity. But that’s not going to solve the problem, and neither is a legal responsibility.
Improving communication to investors
Next, there is the argument of compensation. Regardless of how an advisor is compensated, I feel it is their “moral responsibility” to put the clients’ interest first. There isn’t a compensation model available today that eliminates biased advice.