The five-syllable word represents an attitude, way of life and something you should grasp for the good of investors

December 8, 2014 — 8:44 PM UTC by Guest Columnist Knut Rostad

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Brooke’s Note: Knut Rostad has spent more time helping to wrap the RIA mind around the concept of fiduciary care than just about anyone. The challenge, he knows, is to treat the issue with a Zen-like philosophy. It needs to reach a mass audience if there’s to be any hope of having it backed up by the force of law. But being a fiduciary is really what you do and not what you say or write. It’s about doing what’s right, which means knowing the difference between right and wrong. All too often financial advisors act as if fiduciary care can be defined as simply doing better than the norm. But the norm is still in a fairly pitiable state. In a nutshell, Rostad is telling Robbins: You need to not be satisfied with doing better. Only much better suffices. This column is also a response to this article: 9 ways that Tony Robbins impressed the 'jaded’ journalists at RIABiz.

The media blast about Tony Robbins as a potential RIA spokesman has produced a torrent of RIA comment ranging from the most cynical to the most hopeful. Is Robbins just hyping his book or, as he contends, seeking to help investors who suffered in the 2008-'09 financial crisis As fiduciary maven Ron Rhoades put it, Robbins’ appearance on the scene is a “very positive development, a huge positive.” Though the “jury is still out on the content of his message.”

You don’t need to look into Robbins’ heart for clues. He’s been interviewed endlessly and tonight he has the floor for two hours at the MarketCounsel Summit that begins today. See: Tony Robbins is set to crash the RIA party with two hours of testosterone.

Best in class

Recently, Brooke and Lisa made the case for why Robbins has the potential to be an excellent RIA and investor advocate. They discussed Robbins’ personal background, his own relationship with a breakaway broker and his national prominence as a self-help guru. Fair enough as far as it goes.

But what about Robbins’ views on investing and fiduciary advice?

On investing, Robbins’ big idea is that regular investors can learn and benefit from the “best” investors. Take Ray Dalio, co-chief investment officer of Bridgewater Associates (a prominent hedge fund). Robbins writes about Dalio’s investing strategy: “This will blow your mind and change your life.”

On the fiduciary front, Brooke and Lisa note that Robbins “has been interviewed more than a hundred times in the past few weeks” and “in nearly every interview he pushes the word 'fiduciary.’” They conclude that “Robbins determination to get past the confusion can’t be bad.”

But what does Robbins say?

“People don’t know what the new 'F’ word is. You’ve got to understand what a fiduciary is. Its about income and not assets. You’ve got to have asset allocation. I’ve had a chance to learn from the best on the earth and the average person can learn from them. Step one is to educate the vast majority of consumers. The vast majority of people are so confused.”

Detour ahead

This is it? Four years of research and interviews with the “best on the earth,” including Yale’s David Swensen, Jack Bogle and Charles Schwab? This is Robbins takeaway on what investors need to know about fiduciary conduct? See: What one financial advisor discovered after plunking down $12 for Tony Robbins’ 'Money’ manifesto.

“Loyalty,” “due care” and “utmost good faith,” the touchstones of fiduciary duties, are a just a few words about powerful ideas that investors actually do understand. Robbins should form his recommendations to investors around them.

Robbins says he wrote his book to help ordinary investors badly harmed in the 2008 financial crisis. He explains that he wanted to share with all investors what he learned from the best investors. Fair enough. But then, instead of drawing lessons taught by Schwab, Bogle and Swensen, Robbins constructs a “detour” sign and seems to head in a very different direction. His big takeaway thus far: Its the secret sauce from superstar hedge fund investors such as Dalio that will most help investors. This is what ordinary investors really need to know. See: How Tony Robbins co-opted Elliot Weissbluth (and HighTower data) and vice-versa.

Five pillars of fiduciary

If Robbins aspires to be an RIA spokesman, as some suggest, he’s got his work cut out for him tonight in Vegas. Robbins needs to develop his message to include a financial crisis narrative that connects to the disenchanted investors. He should talk to RIAs about earning investor trust through fiduciary conduct. He should argue how a true fiduciary standard is the starting point, arguably the only starting point, to winning back investors and remaking the investing landscape. He should argue that RIAs may be the only professionals who, through their education and experience and fiduciary culture, CAN do so.

Robbins should:

1. Talk about why investor distrust is a cancer on the industry, markets and the economy. And that RIAs are not cancer free. As Chip Roame notes, investors view everyone in finance like Bernie Madoff. Cite the conservative think tank American Enterprise Institute’s research on how investors view Wall Street as a foreign culture, and concludes, in part, “Many of these [Wall Street] firms are not ethical or concerned about the wellbeing of the country.” See: Why a reputation of shadiness persists in the financial advisory industry.

2. Talk about how some RIAs aggravate this bad situation by resisting transparency. Cite Paladin Registry investor research on fee opacity, or Merrill Lynch Wealth Management’s chief John Thiel’s 'confession’ that his own clients don’t trust him because of fee opacity. Or Ron Carson’s research on advisors’ ineptitude in explaining fees to clients. Refer to the Schwab advertising campaign as an example of how much the issue of fee opacity means to investors. See: Tony Robbins prohibits reporters from covering his two-hour MarketCounsel speech.

3. Describe in concrete terms what RIAs can do to pierce the body armor of distrust. Fiduciary duties generally split between technical and ethical criteria. While both are necessary, stress the ethical criteria. This is where trust is rebuilt. Stress the overriding principles of conflict avoidance, transparency and plain English clear communications. See: New regulatory world dawns with oppressive ADV Part 2 form.

4. Be explicit that fiduciary talk alone won’t cut it; talk alone can be harmful and can damage trust. (See Ron Carson above). Be explicit about what RIAs must do. How they must act. How they must show investors that RIAs are not wirehouse brokers. See: Why Mindy Diamond is morphing her firm away from pure wirehouse recruiting.

5. Brooke and Lisa note that Chuck Schwab advises Robbins that “98% (of investors) should really predominantly go into index funds.” (Jack Bogle and David Swensen may well suggest the better number is 100%, but lets not quibble.) This is good advice that Robbins should take to heart. Tony note to self: 'Listen to Chuck, Jack and David.’ See: Schwab to make long-awaited move in 401(k) market with an all-indexed mutual fund and ETF strategy.

Robbins is an extraordinarily talented and accomplished professional. He could be a very powerful force for good for tens of millions of investors if he so chooses. Let’s hope he does.

Knut A. Rostad co-founded and chaired the Committee for the Fiduciary Standard and is president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy. He is the regulatory and compliance officer at Rembert Pendleton Jackson, a registered investment adviser in Falls Church, Va.



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Fiduciary Advisor Advocate said:

December 9, 2014 — 2:39 AM UTC

These are 5 of the 10 Fiduciary Commandments- if anyone wants to see the rest of them visit www.faadvocates.com look under about FAA- I cut and pasted this so if there are typos my bad but you’ll get the idea

1. Understand and Document Intention of Assets
Why?
• Document stated objective
• Identify Investment time horizon
• Identify risk of loss tolerance •
It’s not Ok to:
Advise without a thorough understanding of the investment pool
• Fail to document
• Assume long time horizon and high risk tolerance
• Ignore or inadequately understand specific requests such as social guidelines, restricted activities etc.
• Ignore or misunderstand tax considerations

2. Formulate Investment Policy Statement
Why?
• Documents investment guidelines
• Documents acceptable investments
• Identifies individuals involved in overseeing assets
• Identifies all involved as Fiduciaries
• Documents exception rules
• Delineates roles and responsibilities
It’s Not Ok to:
• Rely on a ‘proposal generator’
• Provide the Investment Policy Statement ‘short version’ excluding important considerations
• Invest assets without a formal investment policy statement which is agreed to by all parties
• Misalign Investment Policy Statement with spending requirements of the asset pool
• Set it and forget it.
3. Determine Prospective Capital Market Assumptions
Why?
•Document process used to develop prospective risk/ reward assumptions
• Process must adhere academically sound, well vetted theory and practice
• Review capital market assumptions annually at a minimum
• Document qualification of individuals, organizations and technology employed
It’s Not Ok to: • Invest assets without formal capital market assumptions
• Rely on historical relationships to portend into the future
• Derive capital market assumptions without a rigorous, academically sound process.
• Copy someone else’s work

4. Implementation
Why?
•Document process used for implementation
• Ensure appropriate investment vehicles are employed
• Control implementation costs i.e.: trading
• Implementation adheres to guidelines set forth in IPS on an ex-ante (before the fact) basis
It’s Not Ok To: • Assume the custodian or brokerage firm will implement in the best interest of the client
• Utilize inappropriate share classes or investment strategies
• Fail to monitor implementation vis a vis the Investment Policy Statement
• To utilize a UMA structure or overlay manager which does not take a fiduciary position

5. Disclosure
Why?
•Disclose and document all fees paid by asset pool including custodial, embedded and explicit management fees, advisor fees etc.
• Document on a quarterly basis who, how and for what each entity is compensated
• Annual review of all fees, vendor and manager relationships.
It’s Not Ok To:
•Assume embedded mutual fund or ETF fees can be ignored
• Ignore new share classes which can reduce client costs
• Collect any fee (12b-1, finder fee, transaction fee) from any vendor without clear, understandable disclosure
• Assume the prospectus covers your disclosure requirement

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Stephen Winks said:

December 10, 2014 — 10:07 PM UTC

Knut’s comments are well reasoned, yet isn’t the real issue plaguing fiduciary duty, the absence of actionable authenticated (by statute) support for fiduciary duty. This support would establish professional standing and would resolve the technical and an ethical dilemma of retail brokerage of brokers neither (a) being accountable for their recommendations nor (b) their acknowledging their ongoing fiduciary responsibilities in the best interest of the investing public as required by statute.

Pat Mulvey of FAA (Fiduciary Advisors Advocates) fills this leadership vacuum by legitimately advancing the support infrastructure essential to support fiduciary standing (presently required by statute and now in use by advisors in the $100 million and up market) for all investors not possible in a brokerage format. Let’s encourage Tony Robbins to beat the drum on Fiduciary duty, and rely on Pat Mulvey of FAA and other such firms to technically make fiduciary duty actionable. The important point is we do not have to wait on the SEC, FINRA or the brokerage industry to do the right thing, as they will not. The question Wall Street fears is: is there a commercially viable critical mass of like minded advisors who are compelled to act in the best interest of the investing public as required and authenticated by statute. When Advisors are properly resourced, they control their value proposition, cost structure, margins and professional standing in the consumer’s best interest then there is no question that fiduciary duty will prevail as it is in the consumers best interest. Faster, better, cheaper and far more reliable counsel results in the clients best interest.

The free market is the solution.

Every consumer wants their best interests to be served. Advice is not just flipping mutual funds as broker/dealers suggest. A new generation of firms like FAA are emerging that go far beyond TAMPs which can actually help advisors defend their fiduciary standing and fulfill their fiduciary duty.

SCW


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