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The essential component of fiduciary duty -- loyalty -- is what separates the advisor from the salesperson, according to fellow fiduciary advocate Ron Rhoades
February 27, 2015 — 12:06 AM UTC by Guest Columnist Ron Rhoades
Brooke’s Note: Whether you agree or disagree with Ron Rhoades, you’d probably have to agree that his ability to express ideas is breathtaking. En route to spelling out his disagreement with Don Trone, Rhoades parses the suitability standard and the fiduciary standard in words that will make people truly understand their differences for the first time.
Since the original publication of this Rhoades piece, Don Trone has responded taking on Ron Rhoades and Barbara Roper.
While I appreciate Don Trone’s work in the fiduciary movement, his recent opinion in RIABiz, headlined Why Obama and the DOL are all wet when it comes to the proposed fiduciary rule, is ill-informed in part and premature in part.
At its core, the fiduciary standard operates as a constraint on greed. It is both proscriptive and prescriptive in nature; i.e., it has both “negative” and “positive” attributes. While concerns always exist that regulators may stray to far from the principles-based fiduciary standard, and adopt highly specific rules that are subject to evasion, the fact is that we don’t yet know what the DOL rules will contain. I urge Don to re-consider his positions, and be patient as we await the DOL rules. See: Brian Hamburger answers the questions about an SRO future that has RIA stomachs in turmoil.
I applaud Don Trone’s earlier work, which emphasized following a process by which 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 realm 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 (i.e. the client) — that clearly distinguishes the relationship of the parties.
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. See: What the 8 pillars of a FINRA-replacing entity for RIA oversight look like and how personal accountability is key.
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. See: The White House puts its best Obamacare minds behind cleaning up the 401(k) business — starting by issuing a withering memo.
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. See: “Before taking a self-imposed vow of silence, See: One-Man Think Tank: When Wall Street has investors’ 'best interests’ at heart, watch out.
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. See: How Sheryl Garrett got a hush-hush invitation from President Obama and how she pierced the fog about putting clients first.
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 its pronouncements as “rules” and not “principles” seems rather bright line, and premature. We will have to wait and see. See: The White House puts its best Obamacare minds behind cleaning up the 401(k) business — starting by issuing a withering memo. 's
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 that were underemphasized 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.”
Ron A. Rhoades, JD, CFP® is an attorney, investment adviser, and a professor of business law and finance. Commencing July 2015 he will join the Finance Department faculty at Western Kentucky University, where he will serve as program director for its rapidly growing Financial Planning Program.
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