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DOL rule still has feet tangled in the struggle to define difference between 'suitability' and 'fiduciary'

Fiduciares keep flunking a definition of useful accountability and the giant brokerage lobby keeps exploiting its 'F'

Monday, June 27, 2016 – 6:26 PM by Brooke Southall
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Kathleen McBride: [Non fiduciaries] want to be able to check off the box and in so doing find ways to work around the rule.

Brooke’s Note: Sometimes I think the brokerage crowd has a point. It seems almost to be pleading with the fiduciary crowd to do what it can’t — speak English gooder. It seems to say: Tell us in words we can understand and pass along to our constituency just exactly fiduciary care is, why it’s so great and what enforcement of it looks like. It’s not easy. And as the DOL rule bumbles around on the one yard line, Kathleen McBride sent out a press release that said as much. I took it seriously.

Among the handful of jobs that bosses fired me from during my life, the most humiliating may have been in 1979 when I was 16. I was hired to be a nanny — more like a manny — for a young cousin of mine who was six.

I was deemed suitable for the job because I was a relatively responsible teenager willing to work for slave wages way North in the state of Maine where the cousin was staying with his grandparents.

I lasted a week.

My little cousin seemed to like me just fine and nothing bad happened. But my employer, my great aunt, quickly divined that my care of her grandson was not satisfactory. After I was relieved of my duties, I recall a very long, tense drive to the Greyhound station. I wondered what exactly I had done wrong.

My aunt was probably relieved that I wasn’t in a position to appeal my dismissal to FINRA, a body that might have sided with my arguments about how I’d kept a steady eye on my charge, played catch with him and kept him from injury.

But nobody doubted that my aunt, who’d had six daughters, knew proper child care when she saw it — and that I was best sent back to my day summer job in Freeport digging clams. [It’s true, for instance, that I never prepared a meal where peanut butter was the main course.]

Workaround alert

Fast-forward to June 2016 and that same perceivable, yet indescribable, tension between what represents due care of an investor in theory and what is truly right is still the wrench in the gears among those trying to replace rules-based on suitability with ones based on fiduciary care. See: Where Barbara Roper and Ron Rhoades lose traction in their fiduciary arguments.

Now, three months after the DOL issued its long-gestating and controversial final rule on the subject,, comes a press release, issued Wednesday, from Kathleen M. McBride, founder and chair of The Committee for the Fiduciary Standard that reads: See: Fiduciary leaders splinter into two advocacy groups over divergent views.

It reads in part: “In the debate over the Department of Labor Fiduciary Rule many commentators who object to the rule are really objecting to its principles-based approach versus the traditional securities industry rules-based regulation.” See: Part II: Tick, tick … How FINRA tramples on 'settled’ principles of the Supreme Court, and even Adam Smith, in its sanctification of two-hatted advice.

When I asked McBride — who began her career on Wall Street as a broker, bond trader and later an investment advisor, what inspired such a elemental statement so relatively late in the game, she responded:

“It was the lawsuits and congressional attempts to substitute a weak alternative. In the non-fiduciaries’ campaign to have Congress replace with an alternative (largely written by opponents to the rule) — they want to be able to check off the box and in so doing find ways to work around the rule. See: The suitability standard, defined. See: New York conference: SIFMA wants members to be like RIAs — minus the same rules of accountability.

McBride continues: “When CEFEX certifies an RIA’s process to the Global Fiduciary Standard of Excellence, it’s fiduciary principles we look for.” See: Why SIFMA & Co.'s trip to a friendly North Texas court to upend the DOL rule looks more like its Alamo.

Speed limit

Vested interests exploit a vacuum — the kind that forms when no words can find traction — in this instance describing what fiduciary care looks like. Lawmakers abhor such vacuums. See: What Tony Robbins should remember when he talks 'fiduciary’.

The release tries to close this gap:

“As a paper published in 2007 in The American Business Law Journal explains, 'The classic example of the difference between rules and principles or 'standards’ involves speed limits: a rule will say, “Do not drive faster than 55 mph,” whereas a principle will say, 'Do not drive faster than is reasonable and prudent in all circumstances.’ While the [latter] rule is black and white, it may not make much sense during a snowstorm.”

But can a lawmaker take a driving analogy and effectively apply it to financial advice?

Try this one out, from an analysis by Ron Rhoades in an article: The suitability standard, defined.

What suitability looks like in a financial advice context is, for example, putting an old lady into mutual funds that include a diversified portfolio of Fortune 500-type securities. Under that standard, regulators likely won’t blink too hard if the front-end load is high, the fund expenses are high and if tax efficiency fails to come into the analysis. See: An X-ray of one affluent, educated and sophisticated investor’s portfolio shows how it was chewed up by fees.

Ps and Qs

Only by applying more common-sense principles of what the real net objective is do we see that suitability is largely for naught if fiduciary care is left out.

I was once fired as a journalist. The editor who hired me loved my ability to find stories, report them with good sources and tell them as good stories. The editor who fired me hated that I spent all my energies doing that and much less in copy-editing my stories. They often came in rough — a relatively inviolable rule in certain editorial regimes. I went looking for a publication where I believed the bosses would tolerate a few AP style transgressions as long as I did a better—-than-average job getting at the news and story.

My thinking was that in an industry like finance that was so perverted in purpose and where journalists tended to cower on the sidelines — spitting out articles with superficial or insignificant coverage — that applying hard scrutiny to perpetrators of bad business and ferreting out innovators of good business, was more important than “clean copy.”

It was hard to explain to the existing crop of editors in this financial advice publication. Rules of clean writing are much easier to enforce than transgressions related to writing boring, irrelevant or generally uninspired journalism.

In the end, I had to start my own publication for a group of RIA readers who shared my values of making principles a priority over a series of small-rule transgressions like leaving out that IBM is in Armonk, N.Y. or that FINRA is the Financial Industry Regulatory Authority on first reference.

Part of the reason we relate information in story form is that principles jump off the page in that framework. The story fragment of driving 55 is a good place to start.

Mentioned in this article:

FiduciaryPath, LLC
Consulting Firm
Top Executive: Kathleen McBride, President, BCF™, CEFEX Analyst, AIFA®, AIF®



June 28, 2016 — 4:00 PM

Aha…and ha ha! Do you want a copy of the Fiduciary 10 Commandments we put together a couple of years ago? A few things run through my unenlightened mind- 1) Hard for me to believe an 'advisor’ can make as much $$ off a single account acting in a fiduciary rather than suitability capacity. Once all the ways the advisor or his/her firm, TAMP etc. are compensated and the potential misalignment of interest- clients would gag…and perhaps the advisor’s face would turn red. 2) Wonder if this continued 'tangle’ is more of a smoke screen to provide deniability and/or ignorance if called on the carpet. 'Gee Mr/Ms Regulator…I didn’t really understand what this here fiduciary stuff really meant. I thought I was doing it right so spare me’ 3) There are processes which have been in place for years at ERISA and other institutional pools to demonstrate acting in the best interest of the beneficiary (i.e.- client). These processes are available to advisors if they so chose. While such processes do not assure any outcome (no investment does)- they do demonstrate logical, documented, fully disclosed, academically sound rigor to defend that the advisor is acting in the best interest of their client.



June 27, 2016 — 11:37 PM

I’m sure you are trying to connect the dots…it’s not that hard frankly nor theoretical. I do not get this article at all… if it was me you would be fired from this job! More kudos

Brooke Southall

Brooke Southall

June 28, 2016 — 5:14 AM


Please, if it’s not that hard then please spell out the difference between a suitability standard and a

Here’s the catch.

Your definition of 'fiduciary’ can not be merely suitable or you will fail to deliver due care of your reader:)


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