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Stress the carrot and not the stick in formulating a rule that will get real results, says a fiduciary maven
February 26, 2015 — 5:54 PM UTC by Guest Columnist Don Trone
Don’s Note: As a long-time advocate of fiduciary standards, it will probably surprise most people that I am strongly opposed to the fiduciary standard being proposed by the Department of Labor. My reason: What’s being proposed is not a fiduciary standard — it’s more rules that will have a negative impact on all financial advisors, not just brokers. The rules, which are now being reviewed by OMB, will very likely prohibit or restrict certain products and services, and result in increased compliance costs. The DOL is going to make it harder for good advisors to do what’s right, and make it easier for bad advisors to hide within the complexity of additional rules.
The president’s remarks on this Monday about the DOL’s fiduciary rules singled out great advisors who are doing the right thing for their clients. He then changed his tenor and talked about advisors who are “selling snake oil.”
As I considered the president’s remarks, it occurred to me that there are two faces to a fiduciary standard — positive and punitive — and it’s critical that the industry be able to distinguish between the two. See: Why I disagree with Don Tron’e characterization of Obama’s fiduciary stance as 'punitive’
The first face is positive. The presupposition is that advisors are honest and ethical and have the passion and discipline to protect the best interests of their clients. The purpose for defining a positive fiduciary standard is to provide the details on how advisors can improve their investment decision making processes. Let’s inspire advisors to do even better. An example is the handbook, Prudent Investment Practices, written by the Foundation for Fiduciary Studies and published in 2003. In the interest of full disclosure, I was the founder and president of the foundation. (View the handbook here.)
The second face is punitive. The presupposition is that there are advisors who are not honest and ethical, and who put their own interests first. The purpose for defining a punitive fiduciary standard is to define rules that will restrict or prohibit all advisors from certain activities. Let’s define rules in terms of negative motivation — follow the rules, or face the consequences. A good example is the direction the DOL wants to go with its “conflict-of-interest” rule, which has been sent to OMB. The DOL’s mood is reflected in the Phyllis Borzi’s remarks, which followed the president’s on Monday. See: Borzi: Exemptions from conflict of interest will be part of new fiduciary proposal.
In general I have significant concerns, informed by direct experience, about the negative attitude of the DOL being directed towards the industry. I was fortunate to have been appointed by the secretary of the Department of Labor in 2003 to the ERISA Advisory Council. It was an education, and this is what I learned:
- The DOL lacks expertise with the investment management industry — the DOL does not understand or appreciate the role of a financial advisor.
- The DOL views the retirement industry as the enemy — the industry is sucking the life out of pension assets. The DOL views itself as the last line of defense — only the DOL can save retirement plan participants and retirees. See: Proposed DOL regs expose more advisors to fiduciary liability.
- The DOL does not understand the purpose of fiduciary best practices, nor the value of education and training. If the DOL took even one-tenth of their enforcement budget and applied the amount towards education and training, we wouldn’t have the problems we’re experience today.
Most of the fiduciary advocacy we have seen since the Dodd-Frank Act, signed in 2010, is punitive. Different groups have been formed, each declaring or implying that only their members have a true understanding of what it means to be a fiduciary. Their messaging is negative — join our church if you’re a true believer — sinners are not welcomed. See: As DOL contemplates stiff fiduciary-related penalties on advisors, NAPFA and FPA find rare concord with FSI.
Case in point: the DOL’s 408(b)(2) disclosure requirements for fees and expenses. The regulation was trumpeted by the DOL as being the solution to hidden fees and expenses, as a way to help plan sponsors determine who was being compensated by plan assets and to aid in the determination as to whether the compensation being paid to different parties was fair and reasonable for the level of services being rendered. See: Why 408(b)(2) is a flop for the 401(k) business and how RIAs can turn it around.
On the surface, a good thing; a tool to help fiduciaries with one of their critical tasks, which is to control and account for investment fees and expenses.
The result: a report that is too complex for the average lay fiduciary to interpret, and an increase in fees associated with the management of the plan.
The fiduciary movement started approximately 30 years ago. For the first 25 years, the objective of the movement was to define best practices associated with a positive fiduciary standard. The philosophy was simple and straightforward: A rising tide lifts all boats. If we can improve the investment decision-making process of investment fiduciaries, we can have a positive material impact on the fiscal health of our nation. See: Fiduciary leaders splinter into two advocacy groups over divergent views.
We’ve lost our way in defining a positive fiduciary standard. Fiduciary is no longer a point of inspiration for moral, ethical and prudent decision-making. If we don’t act now, we’re all going to suffer under a regime of negative motivation defined in terms of a punitive standard.
Consumers deserve to know that their advisor is working for them. Common-sense rules can protect investors and consumers, prevent abuse, and ensure that brokers and advisors provide advice that is in consumers’ best interests. See: TD throws its first client-best-interest summit, a micro-event, by 'candlelight’ in Palm Beach and ideas rise from the RIA deeps.
I foresee the same problems with what is being proposed — more complexity and cost, but no evidence that participants will be better off.
With that as a background, you can understand why I believe the DOL’s proposed fiduciary standard will be punitive — it will be designed to inflict pain. No one should be cheering.
Don Trone, GFS® is the founder and chief executive of 3ethos. He has been involved with the fiduciary movement for more than 28 years. He was the founder and former president of the Foundation for Fiduciary Studies, and was the principal founder and former chief executive of FI360. He has authored or co-authored twelve books on the subjects of fiduciary responsibility, portfolio management, and leadership.
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