Sunday, January 3, 2016

Part 4: A Deep Dive into the Fiduciary Duty of Loyalty [The Future of Financial Advice: "Who Moved My Cheese"]

In Part 1 of this series, I summarized the recent developments leading to an acceleration of the change in financial services away from product sales and toward fiduciary relationships.

In Part 2 of this series, I explored the distinctions between arms-length (sales) and fiduciary (advisory) relationships, the fiduciary principle, several of the public policy rationales for the imposition of fiduciary duties, and briefly touched upon the various fiduciary duties that exist.

Part 3 explored the impact of fees and costs upon investment returns, and the relationship of academic insights in this area to the fiduciary's duty of due care to control fees and costs incurred by the client.

This Part 4 turns the attention of this series to the most distinguishing aspect of the fiduciary standard of conduct - the fiduciary duty of loyalty.

Capitalism vs. Paternalism: Exploring the Need for the Fiduciary Duty of Loyalty.

“If men were angels, no government would be necessary.” 
- James Madison

“Opportunism.” The undeniable truth is that capitalism runs on opportunism. In his landmark work, The Wealth of Nations, Adam Smith described an economic system based upon self-interest. This system, which later became known as capitalism, is described in this famous passage:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
(Smith, p. 14, Modern Library edition, 1937).
As Adam Smith pointed out, capitalism has its positive effects. Actions based upon self-interest often lead to positive forces which benefit others or society at large. As capital is formed into an enterprise, jobs are created. Innovation is spurred forward, often leading to greater efficiencies in our society and enhancement of standards of living. As Adam Smith also noted, a person in the pursuit of his own interest “frequently promotes that of the society more effectually than when he really intends to promote it.” (Smith, p. 423)
Taken to excess, however, the self-interest which is so essential to capitalism can lead to opportunism, defined by Webster’s as the “practice of taking advantage of opportunities or circumstances often with little regard for principles or consequences.” A stronger word exists when consequences to others are ignored - “greed.” We might define “greed” in this context as the selfish desire for the pursuit of wealth in a manner which risks significant harm to others or to society at large. Whether through actions intentional or neglectful, when ignorance of material adverse consequences occurs, the term “greed” is rightfully applied.
Gordon Gekko in the film Wall Street, who famously declared that “Greed, for lack of a better word, is good,” got it wrong. Opportunism itself – acting in pursuit of one’s self-interest - does not always lead to greed. Rather, it is only when the pursuit of wealth causes significant undue harm to others does such activity arise to the level of greed, and in such circumstances the rise of greed is not “good.”
What would Adam Smith say today? Even Adam Smith knew that constraints upon greed were required. While Adam Smith saw virtue in competition, he also recognized the dangers of the abuse of economic power in his warnings about combinations of merchants and large mercantilist corporations.
Adam Smith also recognized the necessity of professional standards of conduct, for he suggested qualifications “by instituting some sort of probation, even in the higher and more difficult sciences, to be undergone by every person before he was permitted to exercise any liberal profession, or before he could be received as a candidate for any honourable office or profit.” (Smith, p. 748, see also pp. 734-35. As seen, “Smith embraces both the great society and the judicious hand of the paternalistic state.” Shearmur, Jeremy and Klein, Daniel B. B., “Good Conduct in a Great Society: Adam Smith and the Role of Reputation.” D.B Klein, Reputation: Studies In The Voluntary Elicitation Of Good Conduct, pp. 29-45, University of Michigan Press, 1997.)
In essence, long before many of the professions became separate, specialized callings, Adam Smith advanced the concepts of high conduct standards for those entrusted with other people’s money.
What would Adam Smith observe regarding the modern forces in our economy? He would likely opine, given the economic forces that led to the recent Great Recession, that unfettered capitalism can have many ill effects. Indeed, he would observe that for all of its virtues, capitalism has not recently been a very pretty sight. And he would likely proscribe many cures – including prudential regulation through the application of fiduciary principles of conduct upon those who provide personalized investment advice to retail consumers.

Understanding the Fiduciary Duty of Loyalty.

While there have been many judicial elicitations of the fiduciary standard, including Justice Benjamin Cardozo’s lofty early 20th Century elaboration, a more recent and concise recitation of the fiduciary principle can be found in dictum within the 1998 English (U.K.) case of Bristol and West Building Society v. Matthew, in which Lord Millet undertook what has been described as a “masterful survey” of the fiduciary principle:
A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principle is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of the fiduciary obligations. They are the defining characteristics of a fiduciary.[1]
In the U.S., the “triad” of fiduciary duties is most commonly referred to as the duties of due care, good faith and loyalty. But other fiduciary duties are said to exist, including but not limited to the “duty of obedience” and the “duty of confidentiality.”
A further elicitation of fiduciary duties can be discerned from English law, from which the U.S. system of jurisprudence was initially derived. Under English law, it is reasonably well established that fiduciary status gives rise to five principal duties:
(1) the “no conflict” principle preventing a fiduciary placing himself in a position where his own interests conflict or may conflict with those of his client or beneficiary;
(2) the “no profit” principle which requires a fiduciary not to profit from his position at the expense of his client or beneficiary;
(3) the “undivided loyalty” principle which requires undivided loyalty from a fiduciary to his client or beneficiary;
(4) the “duty of confidentiality” which prohibits the fiduciary from using information obtained in confidence from his client or beneficiary other than for the benefit of that client or beneficiary; and
(5) the “duty of due care,” to act with reasonable diligence and with requisite knowledge, experience and attention.
When one is engaged as a fiduciary, the fiduciary steps into the shoes of the client, in order to act on the client’s behalf. As Professor Arthur Laby observed: “What generally sets the fiduciary apart from other agents or service providers is a core duty, when acting on the principal’s behalf, to adopt the objectives or ends of the principal as the fiduciary’s own.”[2]
In fiduciary relationships, a transfer of power occurs – if not the actual transfer of assets (as may occur in a trust or custody relationship), then the transfer of power through the taking, by the client, of the fiduciary’s advice and counsel (as may occur in a lawyer-client or investment adviser-client relationship).
The client permits this close, confidential relationship to exist in recognition that the expertise of the fiduciary, brought to bear for the benefit of the client, can lead to much more positive outcomes.
But such expertise, if improperly applied, can be used to take advantage of the client. The fiduciary, as a expert, possess a much greater knowledge of investments, portfolio management, etc. Also, the client’s guard is down; due to a variety of behavioral biases, client consent to action by the fiduciary is easily secured.
Hence, U.S. fiduciary law applicable to investment advisers guards against the abuse of the consumer through its "no conflict" rule. Reflective of English law’s “no benefit” and “no conflict” principles, the Restatement (Third) of Agency (all agents are, to a degree, fiduciaries) dictates that the duty of loyalty is a duty to not obtain a benefit through actions taken for the principal (client) or to otherwise benefit through use of the fiduciary’s position.[3]
The “no conflict” rule has nothing to do with good or bad motive. The U.S. Supreme Court, in discussing conflicts of interest, stated:
The reason of the rule inhibiting a party who occupies confidential and fiduciary relations toward another from assuming antagonistic positions to his principal in matters involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is justified in a recognition of the authoritative declaration that no man can serve two masters; and considering that human nature must be dealt with, the rule does not stop with actual violations of such trust relations, but includes within its purpose the removal of any temptation to violate them ....[4]
And, as the U.S. Supreme Court said a hundred years ago, the law “acts not on the possibility, that, in some cases the sense of duty may prevail over the motive of self-interest, but it provides against the probability in many cases, and the danger in all cases, that the dictates of self-interest will exercise a predominant influence, and supersede that of duty.”[5]
And, in the seminal case addressing the fiduciary duties of investment advisers under the Investment Advisers Act of 1940, the U.S. Supreme Court observed:
This Court, in discussing conflicts of interest, has said: ‘The reason of the rule inhibiting a party who occupies confidential and fiduciary relations toward another from assuming antagonistic positions to his principal in matters involving the subject matter of the trust is sometimes said to rest in a sound public policy, but it also is justified in a recognition of the authoritative declaration that no man can serve two masters; and considering that human nature must be dealt with, the rule does not stop with actual violations of such trust relations, but includes within its purpose the removal of any temptation to violate them ….’[6]
Or, as an eloquent Tennessee jurist put it before the Civil War, the doctrine “has its foundation, not so much in the commission of actual fraud, but in that profound knowledge of the human heart which dictated that hallowed petition, “Lead us not into temptation, but deliver us from evil,” and that caused the announcement of the infallible truth, that “a man cannot serve two masters.”[7]

[1] Bristol and West Building Society v Mothew [1998] EWCA Civ 533
[2] Arthur B. Laby, SEC v. Capital Gains Research Bureau and the Investment Advisers Act Of 1940, 91 Boston Univ. L.Rev. 1051, 1055 (2011).
[3] See Restatement (Third) of Agency § 8.02 cmt. a (2006) (explaining that under duty of loyalty, “an agent has a duty not to acquire material benefits in disconnection with transactions or other actions undertaken on the principal’s behalf or through the agent’s use of position”).
[5] Michoud v. Girod, 45 U.S. 503 555 (1846). The U.S. Supreme Court also stated in that decision: “if persons having a confidential character were permitted to avail themselves of any knowledge acquired in that capacity, they might be induced to conceal their information and not to exercise it for the benefit of the persons relying upon their integrity. The characters are inconsistent. Emptor emit quam minimo potest, venditor vendit quam maximo potest.Id. at 554.
[6] SEC v. Capital Gains Research Bureau, 375 U.S. 180; 84 S. Ct. 275; 11 L. Ed. 2d 237; 1963 U.S. LEXIS 2446 (1963). The principle is also found in early Christianity: “Christ said: ‘No man can serve two masters, for either he will hate the one and love the other, or else he will hold to the one and despise the other. Ye cannot serve God and Mammon [money].’" Beasley v. Swinton, 46 S.C. 426; 24 S.E. 313; 1896 S.C. LEXIS 67 (S.C. 1896), quoting Matthew 6:24.
[7] Tisdale v. Tisdale, 2 Sneed 596 (Tenn. 1855).

Summary Recitation of a Financial Adviser's Duties of Loyalty and Utmost Good Faith.

There are many possible ways to recite the essence of a financial adviser's fiduciary duty of loyalty. In this section I suggest one such elicitation. A more detailed elicitation of fiduciary standards of conduct, including both additional commentary and sources of law, can be found in one of my prior blog posts.

[I use the term "financial adviser" herein generically, to refer to any actor who is providing personalized financial or investment advice to a retail consumer. Given the remedial nature of regulation in this area, the terms "personalized" and "retail consumer" should be given the greatest breadth of definition.]
Generally.  A financial advisor, who is given the highest degree of trust and confidence by the financial advisor’s client, is a fiduciary and possesses the duty of undivided loyalty to the client.  A financial advisor shall at all times act in the best interests of his or her clients, in utmost good faith, and honestly.
  • The greater the knowledge, experience, and required degree of expertise of the fiduciary, relative to the knowledge and experience of the client, the more significant the fiduciary association becomes as a protector of the client's interest.
  • Clients in receipt of financial planning services will nearly always start off, in discussions with their financial advisors, from a position of contractual weakness and, as to the complexities of tax law, financial planning issues, estate planning issues, insurance, risk management issues, and investments, from the position of relative ignorance.  Fiduciary status is thereby imposed by the law upon the party with the greater knowledge and expertise in recognition by the law that the client is in need of protection and care.
Maintaining Objective Judgment. A financial advisor must use reasonable care and judgment to achieve and maintain independence and objectivity in their professional activities; accordingly, financial advisors must reasonably act to avoid conflicts of interest.
  • A fiduciary cannot serve two masters. The existence of conflicts of interest, even when they are fully disclosed, can serve to undermine the fiduciary relationship and the relationship of trust and confidence with the client. The existence of substantial or numerous conflicts of interest, which otherwise could have been reasonably avoided by the financial advisor, may lead to not only an erosion of the financial advisor’s relationship with the client, but also an erosion of the reputation of the profession of all financial planners and advisors.
Modes and Amounts of Compensation. Financial advisors must not charge an excessive fee; the sum total of all fees and costs incurred by the client should be reasonable in light of the services and investments provided. Financial advisors must not offer, solicit, or accept any gift, benefit, compensation, or consideration that reasonably could be expected to compromise the financial advisor’s own or another’s independence and objectivity.
  • Many types of compensation are permissible for financial advisors, including commission-based, a percentage of assets under management, a flat or retainer fee, subscription fees, hourly fees, or some combination thereof. However, the term “independence” requires that the financial advisor’s decision is based on the best interests of the client rather than upon extraneous considerations or influences that would convert an otherwise valid decision into a faithless act. Additionally, some forms of fees may be inappropriate in certain instances given the needs of the particular client.
  • To avoid disputes with clients relating to conflicts of interest involving compensation, all compensation should be fully and specifically disclosed, in dollar or percentage amounts, in writing and in advance.
  • Conflicts of interest involving commission-based compensation might be best addressed through a “level compensation” or “maximum compensation” agreement entered into with the client prior to any recommendation of an investment product.
Disclosures and Management of Conflicts. Financial advisors shall disclose to clients and properly manage all material conflicts of interest which remain following financial advisors’ reasonable efforts undertaken to avoid conflicts of interest.
  • Disclosure of conflicts of interest does not, in and of itself, negate the financial advisor's continuing duty to act in the best interests of the client.
  • Financial advisors shall adopt and adhere to reasonable policies and procedures for the management of remaining conflicts of interest in order that the financial advisor may continue to act in the best interests of the client. This includes, but is not limited to, the adoption and periodic revision of a code of ethics, appropriate compliance policies and procedures, and sound client engagement practices.
Fairness. Financial advisors shall reasonably seek to not favor the interests of any one client over the interest of another client. Since situations may arise in which the financial advisor’s ability to treat all of the financial advisor’s clients with equal fairness is compromised, or where it may appear that the interest of one client is favored over that of another client, financial advisors shall inform clients in writing and (where possible) in advance of the limitations which financial advisors possess and how the financial advisors will address the situation.
Honesty. Financial advisors must not knowingly make any misrepresentations relating to investment analysis, recommendations, actions, or other professional activities. Financial advisors must not engage in any professional conduct involving dishonesty, fraud, or deceit, or commit any act that reflects adversely on their professional reputation, integrity, or competence.
The Duty of Loyalty Extends Throughout The Relationship. The duty of a financial advisor to act in the best interests of a client cannot be waived by the client; it extends to all aspects of the relationship between the financial advisor and client.
  • Fiduciary duties apply to all of the advice and recommendations provided by the fiduciary to his or her client; fiduciary duties cover the entire relationship, not just specific accounts.
  • Fiduciary duties, once established, cannot be terminated except through termination of the whole of the relationship.
  • The term "fiduciary" is utilized to mark certain relationships where a party with superior knowledge and information acts on behalf of one who usually does not possess such knowledge and information. Financial planning, financial advisory and investment advisory services involve such relationships, as learning the personal details of clients’ financial affairs, their hopes, dreams, and aspirations cultivates confidential and intimate relationships.
Preserve Confidences. Financial advisors shall keep all information about clients (including prospective clients and former clients) in strict confidence, including the client’s identity, the client’s financial circumstances, the client’s security holdings, and advice furnished to the client by the firm, unless the client consents otherwise or except as required by the provisions of law.
No Reckless Behavior. A financial advisor shall act responsibly at all times.
  • Traditionally, the duty of utmost good faith has been closely related to the concept of loyalty.  However, reckless, irresponsible, or irrational conduct – but not necessarily self-dealing conduct – may implicate concepts of good faith.

Financial Advisors Cannot Negotiate Away Fiduciary Status.
The courts have consistently held, applying state common law, that a fiduciary relationship need not be created by contract, and that contract terms as to whether fiduciary status exists are not controlling.
By way of explanation, fiduciary status arises out of any relationship where both parties understand that a special trust or confidence has been reposed. “A fiduciary relation does not depend on some technical relation created by or defined in law. It may exist under a variety of circumstances and does exist in cases where there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one reposing the confidence.” In re Clarkeies Market, L.L.C., 322 B.R. 487, 495 (Bankr. N.H., 2005).
Stated differently, once a relation between two parties is established, its classification as fiduciary and its legal consequences are primarily determined by the law rather than the parties. Legal principles of “waiver” and “estoppel” have limited application in determining whether fiduciary status is applied.
These guiding principles in the application of fiduciary status are not recent; they were known early on in circumstances wherein agreements signed by customers of brokers attempted to negate fiduciary status. In discussing the decisions of two early cases, FINRA stated:  “In relation to the question of the capacity in which a broker-dealer acts, the [judicial] opinion quotes from the Restatement of the Law of Agency: ‘The understanding that one is to act primarily for the benefit of another is often the determinative feature in distinguishing the agency relationship from others. *** The name which the parties give the relationship is not determinative.’ And again: ‘An agency may, of course, arise out of correspondence and a course of conduct between the parties, despite a subsequent allegation that the parties acted as principals.’” (N.A.S.D. News, published by the National Association of Securities Dealers (now known as FINRA), Volume II, Number 1 (Oct. 1, 1941).

Disclaimers and Waivers of Core Fiduciary Obligations are Not Permitted.
The stark difference between arms-length and fiduciary relationships is found not just in the standards of conduct, but also found in the treatment of the doctrines of waiver and estoppel. The DOL’s proposed BIC exemption correctly notes this distinction by prohibiting disclaimer or waiver of the investment adviser’s fiduciary obligations.

In arms-length relationship consent by a customer to proceed, when a conflict of interest is present, is generally permitted. Caveat emptor (“let the buyer beware”) applies to such merchandiser-customer relationships. The customer is not represented by the merchandiser but is rather in an adverse relationship - that of seller and purchaser.
In such instances, it is a fundamental principle of the common law that volenti non fit injuria – to one who is willing, no wrong is done. Customer consent to the transaction generally gives rise to estoppel – i.e., the customer cannot later state the he or she can escape from the transaction because a conflict of interest was present, or because full awareness of the ramifications of the conflict of interest were absent. The customer, in such instances, bears the duty of negotiating a fair bargain. The law permits customers, in arms-length relationships, to enter into “dumb bargains.” Generally, jurists will not set aside unfair bargains unless fraud, misrepresentation, mutual mistake of fact exists or unless the contract is so unjust and burdensome that it is deemed unconscionable.
But the fiduciary relationship is altogether different. The entrustor (client) and fiduciary actor have formed a relationship based upon trust and confidence. In such a form of relationship, the law guards against the fiduciary taking advantage of such trust. As a result, judicial scrutiny of aspects of the relationship occurs with a sharp eye toward any transgressions that might be committed by the fiduciary.
Hence, mere consent by a client in writing to a breach of the fiduciary obligation is not, in itself, sufficient to create waiver or estoppel. If this were the case, fiduciary obligations – even core obligations of the fiduciary – would be easily subject to waiver. Instead, to create an estoppel situation, preventing the client from later challenging the validity of the transaction that occurred, the fiduciary is required to undertake a series of steps:
First, disclosure of all material facts to the client must occur. [For some commentators on the fiduciary obligations of investment advisers, this is all that is required. Often this erroneous conclusion is derived from misinterpretations of the landmark decision of SEC v. Capital Gains Research Bureau.][1]
Second, the disclosure must be affirmatively made and timely undertaken. In a fiduciary relationship, the client’s “duty of inquiry” and the client’s “duty to read” are limited; the burden of ensuring disclosure is received is largely borne by the fiduciary. Disclosure must also occur in advance of the contemplated transaction; receipt of a prospectus following a transaction is insufficient.
Third, the disclosure must lead to the client’s understanding – and the fiduciary must be aware of the client’s capacity to understand, and match the extent and form of the disclosure to the client’s knowledge base and cognitive abilities.
Fourth, the informed consent of the client must be affirmatively secured. Silence must not occur. Consent is not obtained through coercion nor sales pressure (and silence is not consent).
Fifth, at all times, the transaction must be substantively fair to the client. If an alternative exists which would result in a more favorable outcome to the client, this would be a material fact which would be required to be disclosed, and a client who truly understands the situation would likely never gratuitously make a gift to the advisor where the client would be, in essence, harmed.[2]
These requirements of the common law – derived from judicial decisions over hundreds of years – have found their way into our statutes. For example, ERISA’s exclusive benefit rule unyieldingly commands employee benefit plan fiduciaries to discharge their duties with respect to a plan solely in the interest of the plan’s participants and for the exclusive purpose of providing benefits to them and their beneficiaries. And the Investment Advisers Act of 1940 was widely known to impose fiduciary duties upon investment advisers from its very inception, and it contains an important provision that prevents waiver by the client of the investment adviser’s duties to that client.
As one examines the foregoing requirements, it is important to realize that disclosure is neither a fiduciary duty in itself (although various statutes and regulations impose disclosure requirements), nor is disclosure a cure (without much more) to the breach of one’s fiduciary obligations.
Rather, fiduciaries owe the obligation to their client to not be in a position where there is a substantial possibility of conflict between self-interest and duty. This is called the “no-conflict” rule, derived from English law. Fiduciaries also possess the obligation not to derive unauthorized profits from the fiduciary position. This is called the “no profit” rule, also derived from English law.
While there is no fiduciary duty of disclosure, questions of disclosure are often central in the jurisprudence discussing fiduciary law, as many cases involve claims for breach of the fiduciary duty due to the presence of a conflict of interest. In essence, a breach of fiduciary obligation – either by possessing a conflict of interest or by making an additional profit – may be averted or cured by the informed consent of the client (provided all material information is disclosed to the client, the adviser reasonably expects client understanding to result given all of the facts and circumstances, the informed consent of the client is affirmatively secured, and the transaction remains in all circumstances substantially fair to the client).
In essence, asking a client to consent to a conflict of interest by the fiduciary is requesting that the client waive the no conflict rule, the no profit rule, or both rules. Again, clients would only do so in circumstances where the client is not harmed. It would be difficult to believe that client is so gratuitous to his or her investment adviser that the client would incur a detriment, beyond reasonable compensation previously agreed to, in order to provide the adviser with more lucre or other benefits.
Hence, disclosure, alone, is not a cure. And disclosure is only one of the five important requirements, all of which must be met, for a client’s waiver of a fiduciary obligation to be valid.
Some academics suggest that fiduciary duties are merely default rules, and that fiduciary obligations may be contracted away. But, the application of these views is found mainly in the realm of business relationships, such as those between business partners. The advisor-client relationship is an altogether different relationship, in which there are not two sophisticated parties of relatively equal bargaining power (or at least able to hirer attorneys to assist in same). Rather, in the investment adviser-client relationship there exists a huge gulf of knowledge and sophistication. For this reason, even the “contractualists” academics who argue for a contract theory of fiduciary law (as might be applied in business settings, such as between business partners), accept the proposition that core fiduciary duties cannot be waived, at least in adviser-client settings.

[1] See my previous 2011 comment letter and its detailed discussion of Wall Street’s wishful misinterpretation of SEC vs. Capital Gains.
[2] These steps, and legal authority for these requirements, are contained in my prior 2011 comment letters.

In Conclusion. 

Under trust law, the "sole interests" fiduciary standard of conduct (found in most trust law, and under ERISA ) requires the avoidance of conflicts of interest. (ERISA permits the U.S. Department of Labor to provide exemptive relief if the "best interests" of the client is maintained. In addition there are some statutory exemptions from the "sole interests" standard).

Under the "best interests" fiduciary standard (applicable under state common law, and under the Investment Advisers Act of 1940), in contrast, there remains a duty to avoid conflicts of interest. However, in those circumstances in which a conflict of interest is not avoided then a stringent set of requirements is applied to ensure that the client's best interests remain paramount. These procedural safeguards include disclosure of the conflict of interest in proper fashion, ensuring client understanding, and securing the client's informed consent. Even then, the transaction entered into is scrutinized for substantive fairness to the client.

Moreover, since the maintenance of a conflict of interest is regarded as a breach of one's fiduciary duty, the burden of persuasion shifts in the courts to the fiduciary, who must prove that the provided cure to the breach meets the requisite requirements.

Fundamental to the understanding of the duty of loyalty is this notion of avoidance of conflicts of interests. For, as has been said by philosophers, religious scholars, and jurists over the millennia, no many can serve too masters.

There have been those that argue that the Investment Advisers Act of 1940 only requires disclosure of conflicts of interest. As I've written before, this conclusion follows from a wishful, incorrect interpretation of the SEC v. Capital Gains 1963 U.S. Supreme Court decision.

Since early June of this year proposals have been advanced by SIFMA, FSI and other industry lobbyists, subsequently endorsed by FINRA, and now found in Congressional legislative proposals (as of early Jan. 2016), that would create a new "best interests" standard. As I have written previously in several blog posts in 2015, this is but a banal attempt to redefine the term "best interests," and would result in nothing more than an arms-length relationship enhanced by ineffective "casual disclosures." If disclosures worked, there would be no need for the fiduciary standard of conduct, in any legal context. Policy makers should resist any "redefinition" of "best interests" (and, hence, a change to fiduciary law), by resisting, to paraphrase the late great Justice Cardoza, any "particular exceptions" to the strict requirements imposed upon fiduciaries.

Like it or not, the fiduciary standard of conduct acts as a restriction on conduct. Yet, in this modern and complex financial world and era of ever-increasing specialization, the fiduciary standard of conduct is needed more and more as the cure for the vast information asymmetry between financial advisors and their clients.

And, as will be seen in the next post, many current business practices of insurance agents and broker-dealer firms are difficult to reconcile with the fiduciary standard of conduct.

NEXT POST: "Who Moved My Cheese": The Future of Financial Advice (Part 5).

Ron A. Rhoades, JD, CFP® is the Program Director for the Financial Planning Program and an Asst. Professor of Finance at Western Kentucky University, at its beautiful main campus in Bowling Green, KY. He is a CFP certificant, a regional board member of NAPFA, a consultant to the Garrett Planning Network, and a member of the Steering Group for The Committee for the Fiduciary Standard.

This blog represents Ron's personal views and is not necessarily indicative of the views of any institution, organization or firm with whom he may be associated.

Ron is scheduled to provide two presentations in early 2016 on the DOL's rules and the general impact of the fiduciary standard on the financial services industry:
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