July 2017: Time to Take Action to Assist Your Profession

ALL POSTS PRIOR TO 2021 HAVE NOT BEEN REVIEWED NOR APPROVED BY ANY FIRM OR INSTITUTION, AND REFLECT ONLY THE PERSONAL VIEWS OF THE AUTHOR.

Momentum Exists for the Fiduciary Standard, But Much Work Remains to Be Done.

Despite the anti-regulatory environment, momentum has grown for the implementation of fiduciary standards of conduct upon financial and investment professionals. With the support of industry organizations (CFP Board, Financial Planning Association, NAPFA, IAA, CFA Institute, CPA PFP division, and many others), significant progress has been made.

• The DOL "Conflicts of Interest Rule" and related prohibited transaction exemptions are partially implemented (as of June 9, 2017).
• The CFP Board has proposed a "Fiduciary At All Times" ("F.A.A.T.") requirement for its Certificants.
• The State of Nevada amended (effective July 1, 2017) its financial planner law so that both RIAs and BDs and their representatives will be subject to broad fiduciary duties. Other states are considering similar legislation.
• The SEC, under its new Chair, is considering again whether to impose fiduciary duties upon broker-dealers (although whether a bona fide fiduciary duty would be imposed, as opposed to a version of suitability, remains a big "IF").

Much work remains to be done. There are many, many fiduciary "battlegrounds." As discussed below, there are many particular battles in which fiduciary advocates are engaged currently - and your valued input is also needed.

Yet, beyond public policy initiatives (i.e., expressing support for various laws, regulations, and/or association imposition of fiduciary standards), there also exists another need for the development of the financial planning / investment advisory profession. We need to raise the bar - both as to defining our standards and in educating the members of our profession.

We Need to Earn the Right to Possess Our Own Professional Regulatory Organization (PRO).

We need to take charge of our own professional standards of conduct. So that the fiduciary standard will not be lowered or "particular exceptions" created by varying winds of politics. And so that the definition of "what is right" and "what is wrong" is not established by non-practitioners, but rather in a highly contemplative manner by experienced professionals.

"Taking charge" will only happen via a true "professional regulatory organization" (such as that which exists for attorneys, or for accountants in a sense). Such a professional regulatory organization would be granted rights (subject to governmental oversight) to define the requirements for entry into the profession, the right to sanction or otherwise expel bad actors from the profession, and the ability to define educational and continuing educational standards.

Why do we need to take charge, ourselves, of our own professional standards of conduct, and how they are applied? For two primary reasons:

1. To protect both the public interest (as any true profession will do). A professional regulatory organization serves the public interest - via a bona fide fiduciary standard that imposes restraints on the conduct of its members, and via other requirements imposed upon its members.
2. To protect the profession itself. By ensuring that the profession's high standards remain high, this enhances trust from the consumer, and this in turn leads to greater use of the profession's valuable services.

But, a professional regulatory organization for financial and investment advisers will not come easily. We need to earn the right to become a true profession. How? In the balance of this post, I present two ways for you to get involved, and in so doing to advance our profession.

(1) Promote the Adoption of Bona Fide Fiduciary Standards Via Your Own Participation in Public Advocacy.

Granted, our professional organizations have already made great strides in this area. The CFP Board has its new proposed Code of Ethics and Standards of Conduct, the Financial Planning Association has its ongoing support of the Certified Financial Planner(tm) certification), and NAPFA has its longstanding Fiduciary Oath and a strict adherence to fee-only practice.

But we must take great care to ensure that the fiduciary standard of conduct, and its requirements of due care, loyalty, and utmost good faith, remain principles-based and are not subsumed by - as the late Benjamin Cardozo warned against so long ago - "particular exceptions."

But, can we do more in this area? Yes. Primarily through education of policy makers and through advocacy.

So many opportunities exist at present for those who care about our emerging profession. These include:

• Commenting upon, and generally supporting, the CFP Board's proposed revisions to its Code of Ethics and Standards of Professional Conduct.
• See https://www.cfp.net/about-cfp-board/proposed-standards/submit-a-comment
• Submitting comments to the U.S. Department of Labor on its recent Request for Information.
• There are 18 questions in the RFI. Comments about the first question, asking about the delay of the BICE and PTEs until January 2018, are due 15 days after publication of the RFI in the Federal Register (publication is anticipated July 3rd or thereafter). Comments about the other 17 questions are due 30 days after publication. Ways to submit comments can be found in the text of the RFI - located for now at https://www.dol.gov/sites/default/files/ebsa/temporary-postings/definition-of-the-term-fiduciary-request-for-information.pdf
• Submitting comments to the U.S. Securities and Exchange Commission on Chair Clayton's request for comments.
• See https://www.sec.gov/news/public-statement/statement-chairman-clayton-2017-05-31
• Participate in the public policy initiatives of the various professional organizations.
• Seek to join the various public policy member committees of each organization, to have your voice heard.
• Participate in state-level initiatives to influence state/local legislation and rule-making. This is highly important!
• Participate in national-level initiatives, such as visits to your U.S. Senators and your U.S. Representative (either via meeting them in your home state, or on Capitol Hill during national advocacy days that various associations sponsor). [I participated for the first time in FPA's National Advocacy Days in June 2017, and it was a very rewarding experience. A real impact can be made. But instead of 77 participants (as the FPA had in 2017), we need 770 next year - 10x the number. Mark your calendars for a June 2018 visit to Capitol Hill. It will involve your own commitment of time (2-3 days) and money (small registration fee, plus travel costs). But, the result will impress you. For you can have a real impact!

(2) Contribute to the Discussion ... Should a Committee Be Formed to Help Define What Works, and What Does Not Work, To Comply With Fiduciary Standards of Conduct?

As I travel around my region, and around the country, I often hear from practitioners that they are uncertain on how to apply the fiduciary standard of conduct. There is a lot of uncertainty - and a certain amount of frustration, among many of our fellow colleagues.

And, as I meet with, and consult with, financial planning and/or investment firms, I find that many firms lack sufficient understanding of just what fiduciary duties apply to them, or how to apply (under DOL rules, and in certain other contexts) the prudent investor rule. When I point out my own views to these firms, the result is again - frustration in not knowing, and at times disillusionment.

The truth of the matter is that many, many in our emerging profession don't understand why it is important to avoid conflicts of interest, how to properly manage an unavoided conflict of interest, how to comply with the prudent investor rule's duties to minimize idiosyncratic risk and non-waste of client assets, and how to undertake proper due diligence on various types of investments. Nor do some of our colleagues know, more generally, what is required of them under the various fiduciary standards of conduct, nor what is prohibited.

How can we fix this? How can we eliminate - or at least alleviate - the frustrations many of our professional colleagues are feeling at present?

Do we turn to lawyers to help us? I hope not. While I am an attorney (and also a financial advisor practitioner, and an academic), and while attorneys have important contributions to make in providing guidance, few attorneys truly understand what financial planners do. Nor do they possess particular expertise in analyzing investment strategies or investment products or insurance products.

Do we permit "rule making via enforcement"? In which we define what is permitted, and what is not permitted, via the results of enforcement actions - whether they be by federal or state regulators, or by  the CFP Board? While enforcement actions have the benefit of judging real controversies - and this often leads to more careful consideration of the issues presented - the downside is that, alone, learning "how to stay out of trouble" by waiting on enforcement actions for guidance poses risks to each and every practitioner out there. None of us desires to be the "guinea pig" whose conduct is judged. In essence, waiting for a huge body of enforcement actions creates high personal costs for those whose conduct is first judged under fiduciary standards of conduct. And the lack of guidance creates risks for us all. (One might assume that decades of personal investment advice and financial planning would have generated a body of knowledge already. But mandatory arbitration with little in the way of reported decisions deters such a result. As do differences in fiduciary standards over time, and as does the changed nature of the capital markets, new insights from academic research, and the increased complexity of consumers' financial lives).

Is This A Better Solution: Proactive Guidance to All. The proper solution might be to at least partially seek to provide either hypotheticals, or advisory opinions, from a committee of experienced practitioners. Not to establish "rules." But rather to apply the fiduciary principle, and in so applying provide a greater level of guidance to us all.

This, in turn, would lead to better education of us all. Not just in the abstract (i.e., "here's the law or regulation, here's what it says, and here's when in applies). But, rather, education via more concrete case studies, that serve to illuminate the application of the fiduciary principles. So that our fellow colleagues can "up their game" - and their understanding of what is acceptable, and what is not.

How Should We Proceed, If At All, to Form a "Fiduciary Compliance Advisory Committee."

I seek your input and advice.

I submit that the task of serving on such a committee, if it were to be formed, is a daunting one.

Part of the problem is that we have many different fiduciary standards of conduct. ERISA's statutory "sole interests" standard (which incorporates the prudent investor rule). The DOL's "best interest" standard found in its new prohibited transaction class exemptions (B.I.C.E. and 84-24, in particular), which incorporate the tough "impartial conduct standards" and, within them, the prudent investor rule. State common law fiduciary standards of conduct. State legislative / rules applying fiduciary standards. The SEC's application of the "best interests" fiduciary standard found in the Investment Advisers Act. And the CFP Board's and other association standards (to the extent they apply a fiduciary standard of conduct). Hence, anyone serving on such a Committee has a lot of work to do, since any request or advice on a real situation that might arise, or any hypothetical situation, may result in varied conclusions depending upon which fiduciary standard of conduct is applied.

Part of the problem also rests with our own personal biases. Each of us have them. We are a product of our own education, training, and past associations. Setting to the side these personal biases can be difficult, and the best way to ensure this happens is by having at a minimum a committee of say, seven or more members, each with different perspectives and backgrounds, to debate the issues at hand. But all of such committee members must be committed to the profession and its development, committed to the public interest, and committed to and understanding of a bona fide fiduciary standard of conduct. And all of such committee members must possess the ability to be open-minded, and to seek to understand opposing points of view, prior to reaching any conclusions.

So, here are my questions to you:

  1. Would such a "Fiduciary Compliance Advisory Committee" be worthwhile?

  2. If so, should it be formed under the auspices of one or more of our existing professional organizations, and if so, which one? Or should this be an "independent" and "all-volunteer" committee - which by its nature would then possess more limited resources?

  3. What would you like to see the Committee do? Are there specific issues you would like to see addressed? Are there hypothetical situations you would like to submit for consideration? Should the Committee be accepting of requests for advisory opinions?

  4. How would this Committee's work (assuming it is formed) best be accumulated and disseminated? In other words, how would the lessons learned from this Committee's consideration of various issues best be communicated to practitioners, and/or utilized in more formal educational efforts?

  5. Do you have any other thoughts, relating to how to best provide guidance and education to our professional colleagues around the many issues presented by the fiduciary standard?

I look forward to hearing from you.

To submit comments for public viewing, please use the comment function on this blog. (I review all comments before publishing them, primarily as a means of deterring commercial postings.)

Or, please share your thoughts with me, privately, via email to: ron.rhoades@wku.edu.

Thank you.