A Few Thoughts on the Fiduciary Standard

I spend a fair amount of time with the financial news networks running in the background on cable tv. Recently, I’ve seen a big surge in advertisements from RIA firms encouraging people to ditch their brokers since “only fiduciaries” have their best interests at the forefront. They make it sound like anyone who is not a fiduciary will lie, steal and cheat you every chance they get. Searching the internet, I found this quote from a self-styled fiduciary expert; “The fact that the standard for a broker giving advice is essentially, “You are not allowed to rip off your clients — too much,” is an embarrassment to the industry. This allows for all kinds of questionable practices such as selling clients high-fee or potentially inappropriate products like variable annuities, unit investment trusts and expensive mutual funds. These products often do more to benefit the issuing company and the advisor than the client”. This is the message that is being communicated today.

          There’s no doubt, that on paper, it does sound like a fiduciary relationship is far superior to the “suitability standard” for FINRA registered financial advisors. After all, who doesn’t want a professional- lawyer, accountant, banker, plumber or auto mechanic who doesn’t work in our best interests? And to say that the public is confused by having two standards is an understatement. I don’t think anyone- RIA, broker or hybrid- doesn’t wish we had one clear standard for everyone who works with the public.

          While it seems pretty obvious, on paper, the fiduciary standard is better for consumers, as the saying goes, the game isn’t played on paper. Just because someone is a fiduciary doesn’t guarantee excellent or even good results. Fiduciaries, like everyone else make mistakes, sometimes they make bad recommendations and in fact may even act unethically. No designation guarantees good behavior or positive results. Given a set of goals and investor background, experience and risk tolerance, sometimes the investment choices are crystal clear. But more often than not, there is no one perfect investment for any individual investor at any specific time. Is a mutual fund with a 10 year return of 10% and a 3% commission better than one with a 9% return and a 2% commission? What if the fund with the better return just changed Mangers? What if the Client is more familiar and comfortable with the company with the lower return? Sometimes it feels like all the press focuses on is fees/commissions. Yes, fees and commissions are important, but does everyone use the least expensive doctor, dentist or lawyer? Of course not. There may in fact be many nuanced choices and it can be very difficult to downright impossible to select the “best” investment choice.

          Customers are entitled to full disclose of all fees, charges and real or potential conflicts of interest regardless of the standard, that has to be a given. But to assume that for the last 40 years tens of millions of people have been ripped off by their brokers is preposterous and insulting.

          And those of us that are FINRA licensed have to fight this stereotype of the greedy broker doing everything they can to maximize their incomes at the expense of their Clients. It’s imperative that we communicate clearly the value-added we bring. How “we always work in our clients’ best interest”. People just want to be treated fairly and ethically, get professional advice that is specific to their needs and goals and pay a fair price for these services. And while we wait for Congress and the regulators to come up with standards that really work for everyone, it might not hurt to remind everyone that Bernie Madoff was a fiduciary the day he was arrested.