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Why a swing-and-miss on fiduciary standards will haunt us for decades

An ounce of good sense now could save the U.S. economy a pound of unnecessary pain downstream

Author Ron Rhoades, Guest Columnist December 23, 2010 at 2:53 PM
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Ron Rhoades' crystal ball extends to 2025 when Americans finally say 'uncle' to another 15 years of having brokers' interests go first.

Ron Rhoades

Steve Smith

Steve Smith

December 23, 2010 — 7:55 PM

This is the dumbest article ever written. Securities are legal instruments and are sold.
Even the head of FINRA says the standard wont work for Broker Dealers like on RIAs like Bernie Madoff .
What you advocate is essentially the elimination of security sales, including IPOS.

Ron Rhoades

Ron Rhoades

December 23, 2010 — 8:48 PM

Steve, sorry you feel that way.

There are two very broad views of consumers. The first is that everyone should be responsible for their own well being. Just provide information, and permit them to decide.

The more realistic view, in my opinion, reflects the academic research of the past century that, with regard to securities, individual Americans don’t read disclosures, and don’t understand them if they do read them. Financial intermediaries know of this fact, and take advantage of it (and are trained to do so). Also, that there exists a huge gap in knowledge between financial intermediaries and 95% of individual Americans, with respect to financial decisions and investments.

I am not opposed to anyone who sells a security or insurance product, in doing so under a non-fiduciary standard – IF THAT IS ALL THAT THEY DO. However, where such person professes to provide financial or investment advice, beyond a mere description of the product, then under established principles of fiduciary law they have entered into a reslationship of trust and confidence with that client. This means that the advisor is bound by broad fiduciary duties of due care, loyalty, and utmost good faith.

I am even more opposed to those firms and individuals which tout their “objective advice” – when it is not – who use titles such as “financial advisor” or “financial consultant” or “wealth manager” which denote a relationship of trust and confidence, when, at the same time, they profess not to be bound by a fiduciary standard of conduct. Using titles incorrectly, or touting or advertising objective advice, when in fact truly objective advice is not provided – is FRAUD.

Turning to your comments … Should we listen to FINRA (formerly NASD)? Seven decades of refusing to raise standards for securities professionals, and opposition now to a legitimate fiduciary standard for those in advisory relationships. Failure upon failure to regulate its own members – correctly.

Madoff? Regulated by (and frequently inspected by) FINRA/NASD for over two decades, prior to registration as an RIA (for less than 2 years, before the fraud was unvieled).

IPOs? Not eliminated under a fiduciary standard, in which individual investors become represented by purchaser’s representatives. But instead of being hyped, each offering will be forced to withstand greater scrutiny. Capital will thereby become more efficiently allocated. An example? Our firm eschewed investments by our clients in debt backed by pools of mortgage-backed securities … because following our due diligence, we did not believe the security was adequate. If most individual investors were represented by fiduciary advisors, bound by a duty of care (and required due diligence), would the recent financial crisis – with its substantial adverse effects – have occurred?

Fundamentally, the fiduciary standard of conduct is a restriction upon activities. It prohibits many of the conflict-ridden sales practices of Wall Street today. It mandates reasonable compensation. These are restrictions which FINRA, and many of its members, say they cannot live with. I say … it’s long past time to change the way the securities industry works.

If not, consumers will wise up, learn that they cannot trust financial intermediaries, and avoid the contributions to our capital markets that keep our economy humming. This has already happened; I have personally seen many individual Americans have their trust betrayed by those they believed (based on reasonable expectations) had their best interests at heart. The result – many of these have fled the capital markets, never to return.

The point of my article is this … there are much larger issues at play than how much you or I get compenstated. A society who sees the trust of its citizens betrayed, over and over again, cannot prosper economically, in the long term.



December 28, 2010 — 9:41 PM

Written by another all-too-conflicted, self-serving fee only fanatic. To date, the fiduciary standard has in practice been a license to steal.

Steve Smith

Steve Smith

December 29, 2010 — 12:36 AM

Change the securities markets distribution system change capitalism…when the government itself acts as a fiduciary I’ll consider it—

Steve Smith

Steve Smith

December 29, 2010 — 12:58 AM

I re read your article, I still think its stupid. Product is 90 per cent of the problem. But soon we will all be regulated out of business so does it matter? Regulated out of business by government that couldn’t act as a fiduciary if it had too….



August 7, 2011 — 6:01 PM

I find Steve and bulzi’s comments unsubstantiated as well as fully submitting that society cannot change. Relying upon the government to be the sole arbiter of change before one commits to the belief in change is immature, at best. For change to occur, the people must advocate it. Our government was founded upon the will of the people – and whether or not anyone still believes it, the will of the people can affect change. People should not be afraid of the government; the goverment should be afraid of the people. What Ron advocates here is not stupid – it is a testament to what society may be like if we all idle along with whatever the government decides rather than making our opinions – and our frustration with current systems – known. And, to date, I see at least one observation that has come true.

To ask whether anything matters, or to say that any standard is a “license to steal” is simply more proof that your cynicism and unwillingness to stand up for something that is morally right – like what our founding fathers did in standing up to a tyrant who taxed without represenatation – is giving up without even trying.

Before you speak, find the evidence to support your opinions. If you cannot find that evidence, then keep your mouth shut and let those who would try for a better world – with substantiated evidence – speak. All you do by spitting unsubstantiated comments is sit with those who would rather keep their pocketbooks fat than help make this world a better place. Those of us who believe in making change may only stand on our soapboxes for our lives, but at least we tried. At least we attempted to make the world better rather than accept the way things are as how they always will be.

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