Wednesday, April 28, 2010

Fiduciary Responsibility vs. Fiduciary Duty

While the campaign to establish a "fiduciary standard" is commendable in that it could establish fiduciary responsibility for at least advisers, it is not professional fiduciary duty.   Fiduciary responsibility assumes "unavoidable" conflicts of interest, while professional fiduciary duty does not tolerate conflicts of interest.

Already there has been movement to remove registered representatives and insurance agents from any fiduciary responsibility, because they have a contractual duty to their broker/dealer and/or insurance company.  It is assumed that entitles them to only an issue of "suitability".  When a salesman offers a product as suitable, how is that not advice in the mind of the consumer, however well informed?  With "disclosure", the well informed consumer is dumped into the caveat emptor barrel and pickled.  Purposeful confusion about who is commission or fee-based and commission or fee-only but a broker-dealer representative or truly fee-only has been the historical and current result of the SEC and FINRA both seeing their constituency reason for being as salesmen and the investment industry rather than the American public.

This purposeful confusion cannot be abated by transparency alone.  There have to be clear labels with no confusing terms.  A salesman is a salesman who should have a fiduciary responsibility to do no harm to the customer; suitability is not enough.  We have already seen in the current financial crisis what can happen when salesmen are allowed to sale toxic garbage as "investments".

An adviser who receives commissions and so called fee-only representatives of a broker/dealer advisory service are conflicted salesmen who give advice and, as such, are "advisory salesmen" who have a fiduciary responsibility to act in the best interest of the customer despite inherent, not unavoidable, conflicts of interest.  Such adviser salesmen cannot have the same regulatory title as a true fee-only advisor who has the fiduciary duty to act in the best interests of the client without any conflicts of interest.  While an "advisory salesman" will require a documented "process" and a minimal standards based training consistent with current certificant programs to substantiate "advice" culminating in sales, a true fee-only advisor will require education consistent with a rigorous Masters in Finance which includes finance courses, CFA courses, CMT courses, macro-economic courses, tax courses, and retirement and estate planning concepts/case study courses.  A true fee-only advisor would save the client at least 80% or more in total costs.  The salesmen and "advisory salesmen" depend on the current regulatory deception which blurs who is who and what the real cost is to their customers.  There needs to be a true financial advisory profession based on substantive education.

In the United Kingdom, the Financial Services Authority has proposed and is implementing that a financial advisor must be fee only.  This may result in many leaving the advisory trade, because they prefer the money from sales.  That is as it should be.  The choice should be salesman or advisor with no confusing alternatives. Until the general public can have a clear and transparent knowledge of who is who and the costs involved, they will continue to be fodder for salesmen and "advisory salesmen" who hide behind the current regulatory curtains of deception. Simply disclosing a conflict of interest does not go far enough.  Simply disclosing one receives commissions without providing a total cost to the customer does not go far enough. The current "profitable" business model grew out of the purposeful SEC regulatory confusion which panders to salesmen and investment companies.  We have seen time and again this business model is inherently and intrinsically corrupting, if not corrupt.  Regulation of financial advisors needs to be in the best interests of the American public.  This means fee only with no conflicts of interest, no product sales, and no special relationships with proprietary product providers or fund companies or investment management companies or broker/dealer advisory firms. 

All of the debate about harmonization and the impracticality of applying one fiduciary "standard" on all investment sales and advice is a smokescreen for those who want to do both and be perceived as something other than a salesman while letting the broker/dealers and insurance agents go merrily on their way. Mary Schapiro of the SEC said in a December 3, 2009 speech, "I believe all securities professionals should be subject to the same fiduciary duty --- and that all investors receiving advice should rest assured that the advice they get is being given with their best interest at heart.  But to be effective, the fiduciary duty needs to be meaningful and uniform across all securities professionals; it cannot be weakened or diluted just so that it can be applied broadly."  Salesmen and "advisory salesmen" can only have limited fiduciary responsibility and that should be required.  While some current financial advisers go to commendable lengths to address fiduciary responsibility, fiduciary duty without any conflict of interest is possible only in the context of true fee only professional advice.  One standard cannot be applied without diluting required professional fiduciary duty to a sale person's limited fiduciary responsibility in order to elevate sales people from suitability.  It only continues the confusion of who is who doing what.

The Committee for a Fiduciary Standard has allowed the CFP Board to use the fiduciary standard effort as a means to seek recognition as the regulatory organization.  The CFP Board is well known for its dependence on salesmen as members.  The Committee has attempted to get a six step process defining the financial advice "process" included in the financial reform bill which is so basic and minimal that it would include any person who provides any two of the steps, which means it would be extended to include estate attorneys, tax accountants, brokers, insurance agents, trust officers. pension advisers, and potentially many more.  Knut Rostad has laid out the application of six principles for the Committee for a Fiduciary Standard and the CFP Board has long maintained a basic minimal "process" approach to financial planning consistent with its minimal standards of competence.

It appears that any final financial reform bill may exclude this "two out of six" definition of a financial advisor in the Senate version, while it remains in the House version, with respect to a fiduciary standard and replace it with a study on the obligations of brokers, dealers, and investment advisers.  The "two out of six" approach was too broad and aimed at making the CFP Board a choice for a regulatory organization.  It would have been more appropriate to keep the salesmen and "advisory salesmen" under the SEC and FINRA and to have put the true fee only financial professional advisor under the Consumer Financial Protection Agency as an independent agency, but the banksters wanted no possibility of an independent consumer agency and have managed to get it placed under the authority of the Federal Reserve whose consumers are bankers.

The investment sales people have won and the American public has lost.  Fiduciary duty has no home in investment sales.  Sales people want no part of responsibility.  The CFP Board's power grab and the attempt to make diluted fiduciary duty in the form of fiduciary responsibility, as enunciated by the financial standard coalition, palatable to the sales people, upon whom the CFP board is dependent and so actively solicits, has seemingly doomed consumer financial protection on the advisory level and the advancement of financial planning to a professional level.  Given all the confusing business models allowed under SEC rules, a consumer cannot transparently ascertain if a financial planner/investment advisor is a true fee only advisor with a fiduciary duty to act in their best interests only without any conflicts of interest.  It is not in the best interests of investment sales people for consumers to have clear, transparent choices.  The regulatory curtain of deception remains.

The 2008 Rand study clearly delineated the confusion in consumer minds as to who is who and what different financial adviser and financial salesmen do and that current SEC regulations do not help.  It is time to clearly delineate who is who and have salesmen and "advisory salesmen" regulated by the SEC and FINRA, whose constituency is primarily sales people just as the is true for the CFP Board and have true fee only professional advisors regulated by a truly independent Consumer Financial Protection Agency.

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