Monday, November 23, 2015

I Believe In A Bona Fide Fiduciary Standard

I believe in a bona fide Fiduciary Standard.

I believe when you say, "I act in my client's best interests," it means never placing your interests above that of the client. No caveats. No disclaimers.

(I reject the "Best Interests" standard proposed by SIFMA, endorsed by FINRA, and now finding its way in legislation in the U.S. House of Representatives. This "best interests" standard does not require loyalty by the financial or investment adviser. It does not require the continued duty to keep the client's best interest paramount at all times. It permits waivers of fiduciary standards, via mere disclosure. As I've explained before, it is nothing more than "suitability." Worse - it's fraud by rule-making or legislation.)

I believe that core fiduciary duties cannot be waived by clients, nor can disclaimers of fiduciary duties be upheld as legitimate.

I believe that when a person or firm states: "I/We provide objective advice" - It should mean that conflicts of interest are avoided, and that the firm should be held to a nonwaivable fiduciary standard of conduct.

I believe conflicts of interest cannot just be "disclosed away," and that if a conflict of interest is unavoidable then full and complete disclosure of all material facts (including the ramification of the disclosure) must be affirmatively undertaken in a manner to ensure client understanding and to secure the client's informed consent, and even then that the suggested course of action remain substantively fair to the client. For no client would ever consent to be harmed.

I believe when you say, "I am a fiduciary," it means that you cannot push proprietary products, engage in principal trading, receive additional compensation for recommending one product over another, receive revenue sharing payments (including payments for shelf space or 12b-1 fees), or even receive soft dollar compensation.

I believe when you hold out as an advisor (as opposed to a salesperson), whether by use of the terms "financial consultant" or "financial advisor" or "financial planner" or "wealth manager" or any other similar terms, or by using designations such as CFP(r) or ChFC, you represent yourself as a trusted advisor, and should accordingly act as such at all times.

I believe that holding yourself out as a trusted advisor, and not accepting fiduciary status and its burdens and restraints upon conduct, is tantamount to fraud.

I believe that each person should honestly, and forthrightly, say what he or she does, and then should do what he or she says.

I believe that once you accept fiduciary status toward a client, it extends to all aspects of your professional relationship of the client, and that the fiduciary hat cannot be removed.

I believe it is not possible to wear two hats at one time. (And a lot of jurists agree with me.)

I believe that, by either holding out as a trusted financial advisor, or acting as same, you are bound to exercise a professional level of due care, requiring expertise and experience and sound judgment.

I believe, to paraphrase the late Justice Benjamin Cardoza, that the fiduciary standard should not be diminished by "particularized exceptions" which are developed over time.

I believe that I am a steward of my clients' wealth. It is not there for me to play with. I must deal with it prudently, and wisely, applying my vast knowledge of the workings of the capital markets to seek to achieve my client's lifetime financial goals.

I believe that as a financial and investment adviser, I am a professional.

I believe that we, as professionals, should always place the interests of the public ahead of our own.

I believe as a trusted, expert advisor I am entitled to professional-level compensation - not more, and not less.

I believe that promotion of the fiduciary standard will continue, as advocates (such as those in The Committee for the Fiduciary Standard) continue to seek to aid our fellow Americans to receive the honest, trusted advice they all so richly deserve.

I believe that, following the imposition of a bona fide fiduciary standard for all providers of financial and investment advice, the demand for financial planning and investment advice will soar, Americans will become more trusting of the capital markets, the cost of capital will decline, and fuel will be provided to propel America's economy forward.

I believe in The Fiduciary Oath. I believe every single consumer of financial and investment advice should absolutely insist upon the signature of his or her financial or investment advisor to such Oath.

I believe that the best financial planners and investment advisers will migrate to professional associations that seek to minimize all conflicts of interest, by not engaging in third-party compensation schemes. These associations include NAPFA (of which I am a member), Garrett Planning Network (of which I am a member), the Alliance of Comprehensive Planners, and XY Planning Network.

I believe that, over time, consumers will migrate to professional financial and investment advisers that eschew conflicts of interest, whenever possible, and that the media will continue to play an important role in directing consumers to the organizations listed above.

I believe that the time has come to shed the "product sales" roots of the financial planning profession, for once and all.

I believe that we should regulate ourselves. For regulators will usually not understand how to properly evaluate our adherence to our fiduciary duty of due care, nor to our fiduciary duties of loyalty and good faith.

I believe in peer review.

I believe that many of the regulations imposed upon investment advisers over the past 15 years result in time-consuming dotting of the "i's" and crossing of the "t's" - with little impact on deferring fraud or assisting consumers.

I believe that the application of a bona fide fiduciary standard to personalized investment advice, in this ever-more complex financial world, is inevitable. Perhaps not this year, or even this decade. Perhaps not even in my lifetime. But some day.

I believe that government has a role, in setting professional standards, but that government resources are and should be limited, and that government oversight should be reserved for necessary interventions that detect and punish actual fraud and other severe violations.

I believe professional standards of conduct can, and should be, promulgated in such a manner as to provide the professionals with adequate guidance on their activities.

I believe that most advisors would prefer to practice under a bona fide fiduciary standard of conduct, if their firms would let them.

I believe that nearly all consumers would prefer to work with trusted, professional advisers, rather than with product salespersons.

I believe the demise of Wall Street and insurance firms, dedicated to the formulation and distribution of expensive products, is inevitable.

I believe that, even if the huge lobbying efforts by Wall Street and the insurance companies prevent the DOL and the SEC from applying fiduciary standards, that professionals who desire the bona fide fiduciary standard will, nevertheless, prevail in the marketplace over time.

I believe that fees and costs matter, as so much academic research has confirmed.

I believe that, as stewards of our clients' wealth, professional financial and investment advisers possess the duty to ensure that only such fees and costs as are reasonable and necessary are incurred by the client.

I believe that, on average, 90% of the returns offered by the capital markets should flow to individual investors, rather than intermediation consuming 30% to 50% (on average) of those returns.

I believe that capital accumulation is thwarted by our current conflict-ridden financial services system, in which there exist a huge extraction of rents by Wall Street firms, insurance companies, and some others.

I believe that the application of the fiduciary standard will result in a new era of capital accumulation and capital formation, lower costs of capital for firms, and an expanding U.S. economy.

I believe that trust will prevail over betrayals of trust.

I believe that fairness will prevail over greed.

I believe that right will prevail over wrong.I believe.

And - I will continue to believe.

Ron A. Rhoades, JD, CFP(r) serves as Director of the Financial Planning Program at Western Kentucky University. The views expressed herein are his own, and are not necessarily representative of those institutions, organizations and firms of which he is a member.

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