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Why Obama and the DOL are all wet when it comes to the proposed fiduciary rule

Stress the carrot and not the stick in formulating a rule that will get real results, says a fiduciary maven

Author Guest Columnist Don Trone February 26, 2015 at 5:54 PM
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Don Trone: Fiduciary is no longer a point of inspiration for moral, ethical and prudent decision-making.

RIA Compliance

Barbara Roper

Barbara Roper

February 26, 2015 — 8:03 PM

It is unfortunate that Mr. Trone has chosen to condemn the DOL’s rules without having had the benefit of actually reviewing them. He also fails to explain how requiring brokers to act in their customers’ best interests when they give advice, which is what DOL has said it plans to do, would be punitive, or negative, or bad for retirement savers. Unfortunately, while I have often admired Trone’s writing, this opinion piece is, in my opinion, “all wet.”

Prof. Ron Rhoades

Prof. Ron Rhoades

February 26, 2015 — 9:49 PM

I concur with Barbara’s comment. I applaud Don’s earlier work, which emphasized following a process to adhere to the fiduciary duty of due care (which imposes largely “positive” obligations, in the sense that “you must do this”).

However, the fact of the matter is that the fiduciary duty of loyalty (which imposes “negative” obligations – in the sense that “you must not do this ….”) is the very core of the fiduciary principle. It is what differentiates, to a much larger degree, the fiduciary standard from the weak standard of suitability. It imposes a duty to avoid conflicts of interest. While the duty of due care (including due diligence) varies somewhat from the suitability to the fiduciary realm, it is the fiduciary duty of loyalty – in which the fiduciary finds herself or himself stepping into the shoes of the entrusted (client) – which clearly distinguishes the relationship of the parties. No longer are the parties dealing at arms-length, as in a sales relationship, but rather they are in a fiduciary-client relationship. The fiduciary duty of due care is enhanced from that of suitability, and the fiduciary duty of loyalty is imposed – the latter being the distinguishing characteristic of the relationship.

By way of further explanation, U.S. courts have in large part adopted the view of fiduciary obligations as resting upon “the triads of their fiduciary duty—good faith, loyalty or due care.” See In re Alh Holdings LLC, 675 F.Supp.2d 462, 477 (D. Del., 2009). The duty of loyalty, in turn, reflects several more specific duties (or principles), including those of “no conflict” and “no profit” (other than agreed-to-in-advance reasonable, expert-level compensation). Again, I would state that the fiduciary duty of loyalty, with its prohibitory attributes, is what makes the fiduciary relationship so distinctive from other commercial arms-length relationships.

The fiduciary standard is a principles-based standard, whose broad prescriptions apply in a variety of contexts. It must be free to adapt, as fraud is infinite and business practices change over time. However, it is possible to derive from established authorities more specific standards of conduct applicable to those who provide personalized investment advice. These are often not “rules,” but rather a further elicitation of fiduciary principles. These standards can serve to inform and guide the fiduciary provider of personalized investment advice to a plan sponsor, plan participant, or IRA account holder.

As to Don’s criticism of the work undertaken by many different organizations over the past decade or so, in advancing further understanding of the fiduciary duties (including the fiduciary duty of loyalty), I believe such criticism is unfounded and is a disservice to the dozens, if not hundreds, of individuals who have labored to advance the profession. Moreover, Don’s view reflects a misunderstanding of the breadth of the fiduciary principle, and a refusal to acknowledge the fact that adherence to the fiduciary duty of loyalty is what makes a fiduciary expert possess the singular characteristic clients desire so greatly – trustworthiness.

We do not know the language of the DOL’s proposed rule, at this time. Hence, characterization by Don Trone of their pronouncements as “rules” and not “principles” seems rather bright-line, and premature. We will have to wait and see.

Again, while I applaud Don’s work in the area of defining a process for adherence to the duty of due care, there are many aspects of the fiduciary principle which were under-emphasized in his prior publication, in my opinion. While Don may desire that we all seek to adhere to lofty, positive prescriptions, the law serves to impose not just positive duties but also negative proscriptions. For, as James Madison wrote in Federalist Paper No. 51, “If men were angels, no government would be necessary.”

Grant Barger

Grant Barger

February 27, 2015 — 12:13 AM

—-Calling All Advisors!—-
The day is coming! All advisors will be considered “fiduciaries” and the watered-down context of the actual content of the fiduciary oath will drag all authentic fiduciaries down to the lowest common denominator. (Q)How will the serious steward of wealth overcome being defined by an industry which continues to cannibalize itself through paradoxical mandates? (A)The serious financial professional realizes that he or she is in complete control of the perception of his or her value and authenticity.
As well-intended as the fiduciary standard is, it cannot survive this industry that has proven itself devoid of trust (about every 8 years or so). So it will be incumbent upon the serious advisor, who considers him/herself as a fiduciary, to go beyond the industry standards and mandates handed down from any institution or administration. It is time to go beyond fiduciary…Why in the world would a serious advisor want to be defined by his or her industry when he/she can define his or her authenticity and back it up with execution that is definable detectable and desirable? In fact, it will be critical for all serious advisors to take action and define their unique value and integrity model if they are going to thrive in the age of digital advice. So fiduciary has served a purpose… to get us here… what will come next is entirely up to each individual advisor.
—-Punitive Actions—- I agree with Don that the main concerns of the current authentic fiduciary should genuinely be – the punitive actions that will follow this watershed juncture, because there is no upside for the authentic steward… only more bureaucratic red tape. I feel some genuine empathy for Don because he is seeing the writing on the wall… he has dedicated a majority of his life to trying to make sure the actions of a few do not sully the reputations of many. I am grateful that he has shared the genuine concern he has about the state of the industry, which has been delivered in a relatively reticent fashion… compared to the absolute rage that most authentic fiduciaries will be feeling when this actually hits home…the realization of this regulatory defiling of their long standing badge of honor. Thank you, Don for sharing your insight in such a timely fashion and thank you for your service.


Larry Elford

Larry Elford

February 27, 2015 — 1:11 AM

As a longtime follower and supporter of Don Trone’s good work surrounding fiduciary duties, I have to say I am less than convinced by his current writing. Without going into great detail, I side with Barbara Roper and Prof. Ron Rhoades. @RecoveredBroker

Stephen Winks

Stephen Winks

February 27, 2015 — 3:19 PM

We should have learned from our fight for Brokers to acknowledge their ongoing fiduciary responsibilities. Until fiduciary duty is codified and executed by advisors, the transactions industry and its advocates are very resourceful and will be doing everything in its power to minimize the codification of fiduciary duty. Products do not add value, it is what the advisor does with products (or prudent process) that adds vale. A more modern approach to portfolio construction is required where cost is an important consideration to rendering individualized advice based on all a clients holdings.

Don is just wisely saying, keep vigilant. We may go through a period of refinement if not from regulators, then the industry or brokers in the execution of fiduciary duty . The free market is important here in getting it right in according professional standing. Just as there is a difference between being an accountant and a CPA, given the brokerage industry’s misunderstanding of fiduciary duty, our trade associations must gear up their credentialing—to determine the ultimate achievement of, not the aspiration of, fiduciary standing.

This will mean many (especially independent brokers) who think they are acting in a fiduciary capacity, are going to require a much different type of support. It is not business as usual. Broker/dealer advice products that give the broker no control over their value proposition, cost structure, margins and professional standing will give way to an expert authenticated prudent investment process that advisors manage (the literal definition of financial services) which is materially different from the selling of brokerage advice products.

A new era of innovation in the consumer’s best interest is emerging. It may be seem incongruent but our largest broker/dealers, with massive resources and scale, may emerge as our most astute supporters of fiduciary duty.


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