Early Fiduciary Counter-Arguments Miss the Mark

Last week, while taking a shot at New York prosecutors suing his company for allegedly misleading investors on the safety of auction rate securities, Charles Schwab also took the opportunity to criticize proposed regulatory reform.  Schwab argued that regulatory proposals seek to limit individual investor risk through the adoption of consumer protections and fiduciary liability for brokers to the point of virtually eliminating investor choice.  However, Schwab's claim misses the mark completely in terms of fully appreciating the debate on fiduciary issues.  

In fact, the discount brokerage model that Schwab seeks to defend is not even really at issue.  Rather than trying to eliminate traditional and discount brokerage functions, proponents of the fiduciary standard would rather see a clearer demarcation develop once again between advisory and brokerage services.  In seeking this demarcation, fiduciary advocates aim to protect those investors who receive investment advice and assume that their interests are being placed first.  To this end, regulatory reform is not about removing investor choice as Schwab argues, but rather ensuring that investor choices are clearer and that investors are aware of the risks they are assuming, whether they choose to get professional advice or venture out into the market on their own. 

As views like these from the other side of the fiduciary debate emerge, it's important not to lose sight of the ultimate goals of strengthening investor protection and restoring integrity in the financial and investment industry. It's also important not to forget what it means to be a fiduciary and its signficance to the investor.  However, there are many in the industry that would like to draw attention away from this focus. 

In a recent interview, Allan Hancock, a former President of the National Association of Insurance and Financial Advisors, argued that the fiduciary standard being driven by the financial planning community is not needed in the insurance industry and will ultimately harm consumers because it is focused more on paperwork, compliance, and turf wars in Washington.  When asked if any of his customers have asked about the fiduciary standard, Hancock stated, "Not at all. ... They don't buy based on comparison. They buy if they trust you, if you have credibility, if you have a reputation, and you care about them."  Last time I checked, what Hancock describes as his customers' main concerns are the very essence of the fiduciary standard - trust, loyalty, and due care.  So not only does Hancock's fiduciary counter-argument miss the mark, but it appears to further the discussion in favor of fiduciary values.

Hancock also tries to cloud the issue by asserting that clients and customers don't care about the word "fiduciary."  Hancock may be right that clients don't know or understand this word.  Indeed, most individuals I encounter outside of my professional circle don't even know how to pronounce or spell it.  That doesn't mean, however, that they don't care about what it means and how it affects their financial and investment decisions.  Clients who are entrusting financial professionals with their life savings, children's educations, retirement, and overall financial security have a right to expect a high level of care from those professionals.  And, as found in the oft-cited Rand Report, clients already generally assume that their financial advice is in their best interest. Adopting the fiduciary standard would guarantee that high level of care and validate clients’ assumptions.

With August coming to a close, the frenzy of activity in Washington aimed at moving financial regulatory reform forward is poised to pick back up where it left off at the end of July.  However, as the comments of Schwab and Hancock illustrate, the debate over those reforms, and especially the application of a fiduciary standard to all investment advice givers, is far from over and in many respects is just about to begin.  While it might be easy to dismiss the early remarks of Schwab and Hancock, the fiduciary movement and investors alike would be better served if we remind ourselves what is really at stake and use it to prepare for the larger debate about to unfold.  

Comments

[Jan Sackley]

Great assessment!