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History Provides Hope for Institute for the Fiduciary Standard’s New Best Practices

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We all know the story of the Stock Market Crash of 1929. By Sept. 3, 1929, the DJIA had increased tenfold over the preceding nine years, to 381. But by closing time on October 29—Black Monday—it had fallen to 230, a loss of 40%, and by 1933, the resulting depression had driven the stock market down to 20% of its pre-crash value. Not only had many people lost large portions of their portfolios, but large and small banks all over the country went under, taking their depositors’ saving with them.

The stock market wouldn’t recover for almost a decade, boosted largely by massive government spending during World War II. But the effect on the people who lived through the crash and subsequent Depression would last a lifetime. Well into the1960s my grandparents on both sides still had a deep distrust of banks and of Wall Street.  

Recognizing that the country had a serious “trust” problem, newly elected President Franklin Roosevelt (whose 1932 campaign platform had been to give Americans a “New Deal”), together with the Congress enacted a series of laws designed to restructure the financial industry and resort confidence in it. Those bills included the Glass-Steagall Act of 1932 (separating commercial banks from investment banks); the Banking Act of 1933 (creating the FDIC to insure bank deposits); the Securities Act of 1933 (the first law to regulate the sale of securities); the Securities Exchange Act of 1932 (which created the SEC), and the Investment Advisers Act of 1940 (requiring adviser registration and oversight). 

While these new laws obviously didn’t eliminate all the unease with the country’s financial system (e.g., consider my grandparents), they did restore enough confidence in our government to enable us to recover economically, and, together with the British and the Russians, to build massive armies and navies sufficient to defeat the Nazis and the Japanese in World War II. 

Fast forward to the Mortgage Meltdown of 2008. Our government’s response to the largest market drop since Black Monday has been threefold: a massive financial bailout of the banking institutions and insurers involved, the Dodd-Frank Wall Street Reform Act, that has done little in the way of actual reform, and the Department of Labor’s new conflict of interest rules—which where hotly contested by most of the financial services industry (and which still face legal challenges). 

Is it any wonder then that as Institute for the Fiduciary Standard president Knut Rostad said in a press conference Monday: “A cloud of investor distrust persists eight years now since the outset of the financial crisis.” To solve this problem, which seems beyond the abilities of our political leaders on both sides of the aisle, the IFFS announced a set of Best Practices for Fiduciary Advisors as part of its Fiduciary September 2016 initiative. 

To support his claim, Rostad cited Wall Street Journal and Gallup surveys showing that “consumer confidence in the financial industry from 2008 to 2014 or 2015 shows miniscule upticks:  from 10% to 13%, and 12% to 13%.” What’s more, he said, “In 2012, an Atlantic / Aspen survey asked consumers if executives of large Wall Street banks ‘share their same fundamental values’ or have a “a different set of values.” The survey found that 79% of consumers believed those executives have different values.” 

While reforming large financial services institutions and their executives may be a tall order, Rostad and the IFFS believe reforming the industry from the ground up—starting at the advisor level—is a lot more doable, and consequently more promising.

By now, you may have read about the 12 Best Practices for Fiduciary Advisors, although they have been tweaked a bit. According to Rostad, the Institute has three focuses: 

  • to identify concrete actions or “deeds,” that establish one as a “fiduciary advisor;
  • to make these deeds reasonable for practicing advisors in the real world (as opposed to theoretical standards);
  • to encourage advisors to disclose that they will perform these actions for every client, in their Form ADVs, and publicly on their websites. 

Here is what following the finalized Best Practices will require of an advisor: 

  1. Put into writing that fiduciary duties apply at all times – not just sometimes.
  2. Give advice that’s reasonable – and explain the advice in writing if asked.     
  3. Put important agreements and disclosures in writing.
  4. Provide estimates of total client fees and costs in writing at the start of the relationship and then afterwards annually on request.                              
  5. Avoid conflicts – and if not possible disclose in writing, manage, and for important conflicts, get client consent to proceed with conflicted transactions .
  6. Avoid principal trades – unless the client initiates a request.
  7. Avoid compensation from client transactions – and, if not possible, show how the product recommendation serves a client’s best interest                
  8. Avoid gifts and entertainment that are not minimal and occasional.                   
  9. Have the appropriate base and ongoing education to render competent advice.
  10. Use an investment policy statement or process and provide a sample if asked.
  11. Make sure fees and expenses are reasonable.                         
  12. Affirm in writing adherence to Best Practices and the Best Practices can be met.

The hope of the Institute is that as a growing number of advisors publicly adhere to these principles, and the media picks up on their actions, increasing public awareness, the rest of the financial services industry will have to adopt similar standards in order to compete.

There is some historical precedent for this kind of a grass-roots approach: Back in 1971, a group of mutual funds salesmen met in the Chicago O’Hare Hilton. The booming stock market of the 1960s, known at the time as the “Go-Go Market,” had taken a nosedive two years earlier, taking the new mutual fund business down with it. 

There was considerable anti-Wall Street, anti-financial services sentiment in the country, and those salesmen were looking for a new way to better serve their clients—and equally importantly, distance themselves from traditional, big firm sales. Their solution was to create the profession of “financial planning,” essentially the same comprehensive approach to personal finance that’s still in use today. 

They changed the financial services industry.

Perhaps that’s the problem: as financial planning has gone “mainstream,” it’s lost its distinction from what goes on at Wall Street investment banks, and at virtually every broker-dealer and retail bank across the country.

But maybe the IFFS’s Best Practices will create a new wave of client-centered advisors, who will restore public confidence in the profession of financial advice. 


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