A true fiduciary standard can't compromise basic principles

In my most recent Fiduciary Corner column in Investment News, I wrote about The Committee for the Fiduciary Standard and the five fiduciary principles the Committee focuses upon. The five principles capture the essence of the fiduciary standard that is well established in law and regulation. They are paraphrased here:

1. Place investors best interests first (singular duty of loyalty to the investor)
2. Provide advice with the skill, care, diligence and judgment of a professional (duty of due care or the prudent expert standard)
3. Provide full and fair disclosure of all material facts (duty of utmost good faith)
4. Avoid conflicts of interest (because conflicts are situations that make fulfillment of the duty of loyalty less reliable)
5. Manage unavoidable conflicts in the best interest of the client (which is meant to assure that the objectivity of the advisor is not impaired)

Some financial service industry trade groups and a handful of transaction-oriented firms are advocating, either overtly or by lobbying legislators behind the scenes, to establish a “new fiduciary standard” that purportedly would draw from both the principles-based fiduciary standard and the lower rules-based fair dealing standard associated with traditional brokerage activities.

While these efforts are couched in terms of finding a workable compromise solution, they amount to a call to abandon the true fiduciary standard and christen the fair dealing standard as the “new fiduciary standard.”

Simply put, you can’t compromise principles and claim to adhere to them.  Consider what it would mean to compromise on the five fiduciary principles.

1. Compromising the singular duty of loyalty results in divided loyalties, which is at odds with the very definition of a fiduciary.
2. Compromising due care results in acceptance of less than a professional level of competence.
3. Compromising on full and fair disclosures results in the suppression of material information and a failure to provide the transparency crucial to relationships of trust.
4. Accepting conflicts of interest that can reasonably be avoided undermines the integrity of the duty of loyalty.
5. Permitting unavoidable conflicts to be merely disclosed rather than managed in the best interests of clients creates a “buyer beware” overtone to client interactions that is inconsistent with the entire concept of professional advice

In short, regulatory reform that compromises fiduciary principles is not reform at all; it is regulatory regression that would weaken investor protections and push the business of investment advice further from becoming a true profession. Moreover, the fiduciary standard stripped of its core principles bears no resemblance to the true standard whatsoever. Please speak out on behalf of investors and the professionalization of investment advice by contacting legislators and regulators, commenting on financial blogs like this one, and joining The Committee for the Fiduciary Standard (www.thefiduciarystandard.org).