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Why the 'f' in fiduciary matters

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The case for the “F” or “f” is literally that. Is it upper or lower case?

An upper case “F” represents the technical definition of who is considered a fiduciary. The Department of Labor (DOL) will ultimately decide and it is what we are in a quandary about. Is it someone who sells certain products to certain people under specific circumstances? Someone who gets paid a certain way or gives a certain kind of advice?

The lower case “f” represents the generic definition of a fiduciary. According to Wikipedia, the definition is “a person who holds a legal or ethical relationship of trust with one or more other parties…[and is] expected to be extremely loyal to the person to whom he owes the duty (the “principal”): such that there must be no conflict of duty between fiduciary and principal, and the fiduciary must not profit from his position as a fiduciary (unless the principal consents).”

The upper case is the letter of the rule, and the lower case is the spirit. In the hubbub, I’m not convinced that the government and the financial services industry are as misaligned as we think, assuming the spirit of the rule is the ultimate North Star.

While it’s intuitive that commission-based sales could bias an advisor to sell certain products, it’s as clear as mud relative to how much of a difference it actually makes. The DOL estimates the cost to investors of commission-related sales bias at 1 percent per year in investment yield. But the DOL does not account for the value of other aspects of advice that might have an offsetting value.

In fact, none of the studies could prove that the positive correlations between advice, the amount of savings, and the confidence levels of consumers were or were not causal relationships. The only thing that was used as a measure of determining what was in the client’s best interests was the return. To get that return, the consumer would have had to know exactly where and how to obtain no-load funds that look just like the ones he bought from advisors. Yikes!

So the real assertion is that the advisor is being paid too much. If that’s true, we have an even bigger problem on our hands than being held to a new standard. We could do more studies and find no single right answer. Worth, after all, is subjective.

So what should we do? First, continue to have the dialogue with the DOL, but make sure that everyone is talking from the same set of facts, and challenge each other on them. For example, the support for the 1 percent was really hard to find, and what I found was weak at best.

More important, consider the small “f,” and consider the big question of the value of advice. We must consider that:

  1. Not everyone values the same things. This indicates both a need to understand what’s important to whom and why;

  2. The landscape of consumer behavior has changed. This indicates new expectations around the experience. Robo-advice is just one; there are others; and

  3. If we are under attack, it means there is something out of whack, and we have not addressed it. It means there is an unmet tension that someone will ultimately find a way to satisfy, which spells disruption.

The best question we can answer is, “If we were creating the industry today, as if financial advice didn’t exist before, how would we design it?” This is the same question innovative health insurance startups were asking themselves, regardless of whether or not PPACA ever passed.

Ultimately, consumerism wins the day, and consumers were starting to demand a different experience anyway. How are consumers feeling about the current state of financial advice? Do we really know?

Consumer-driven insight is how we drive our ability to consistently reimagine our business. I challenge you to consider this regardless of what happens with the “F” in fiduciary standard.


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