Those folks who follow my column regularly will recognize the word… fiduciary. What they may not all comprehend however is the true meaning of the word. In the world of legal definitions it is generally associated with anyone who is entrusted with the responsibility of acting in the best interest of another person.
A fiduciary may include a trustee, a business or financial adviser, attorney, guardian, estate administrator, banker or stockbroker. The fiduciary is assumed to have more knowledge and expertise about the matters being handled and is held to a higher standard of conduct and trust than a stranger or a casual businessperson. Conflicts of interest must be avoided where the fiduciary’s interests are not in the best interest of the person who trusts him/her/it. For example: a stockbroker must consider the best investment for the client and not what brings him/her the highest commission. The client’s best interest should be primary even if a fiduciary and client join together in a business venture.
Last month, The Securities and Exchange Commission said that it would move toward a uniform fiduciary standard for broker-dealers, investment advisors and others in the securities industry. And while this is certainly welcome news for the consumer, there are also a few inherent dangers buried in this announcement.
First is the scope of the standard. Registered Investment Advisors have had a fiduciary duty to clients since the 1940’s with the passage of the Investment Advisor’s Act, but not all those who hold themselves out to the public as advisors come under its jurisdiction. A person, such as an insurance agent having no securities licensing or registration is NOT bound to the fiduciary standard, nor will they be, apparently, under the new SEC proposal. Unless the standard is broadened to include all persons offering advice, there will be huge loopholes in which “non-fiduciaries” can reside. This is fertile ground for consumer abuse.
The second danger lies in the fact that most regulatory agencies, the SEC… and it’s close partner FINRA… are “rules” oriented. Fiduciary standards should be based on “principles” and not rules. Just as you cannot legislate morality, trying to define “fair dealing” may create a monster. The devil is… and will certainly be… in the details.
Topping it all off, since the elimination of Glass-Steagall, the functions of bankers, insurance agents, brokers and advisors have become muddied. How is an investor to know who or what he or she is dealing with now that everyone’s business card contains some “advisory” reference in an often vague… but important sounding… title? Decades ago, most investors in the stock market were wealthy and either had the knowledge themselves or were in a relationship with a trusted and competent advisor. With the popularity of defined contribution plans, such as a 401(k), the responsibility for one’s own retirement cuts across...
There’s an old expression in the financial services industry that goes something , “It’s hard to tell who’s swimming naked until the tide goes out!” I’ve used it several times to describe various trends in our business, but perhaps it’s most well-related use is in the unveiling of Ponzi schemes .