industry insight BY
The Broadest Fiduciary Standard
If we want uniform rules on investing recommendations,
why stop at advisors?
Years ago, Money magazine created a list of top financial advi- sors. If you wanted to be on that list, you had to answer a detailed questionnaire about how you provided advice to your clients.
Just for fun, I filled out the lengthy form — on behalf of Money magazine itself. After all, it, too, was in the business of giving out investment advice.
When I came to the question about how, exactly, is detailed, specific information about clients gathered, I wrote cheerfully: “We don’t.
We just give investment advice without having any idea about the
actual financial situations of the people who are receiving it.”
How do you provide your portfolio recommendations? “We mostly
recommend hot funds, and never ever
tell you when to sell them, all the while
having no idea about the current asset
allocation mix of the people who receive
There was a question about conflicts
of interest: How are you compensated? I
answered: “We get paid primarily by a lot
of companies that want to sell their prod-
ucts to the people we give advice to.”
What credentials or designations
have you earned? “None. Why would
we need those?”
What continuing education requirements do you meet on a yearly
basis? “Ha, ha, ha” ... followed by a chuckle.
advisors, brokers and agents who make up the
financial services world.
This is crucially important issue for everyone reading this column. But I sometimes wonder whether the effort to protect investors isn’t
focused too narrowly. The professionals who
will (or will not) be fiduciaries offer, at most, a
tiny sliver of all the advice received by the consuming public. And, as my little exercise with
Money magazine shows, the advisory world is
far from being the most conflicted provider of
Money and its competitors still
breathlessly report on “the best mutual
funds to buy now,” offering different recommendations every six months or so.
Cable channels offer nonstop coverage of
minute-by-minute market moves, when
every bit of research tells us a short-term
investment perspective can be deeply
harmful to client portfolios. Men and
women in business suits routinely predict the future with straight faces.
Stock touts used to be marginal
members of the criminal underclass, on
a par with touts at the racetrack. Now, they may
be celebrities and/or media personalities.
Meanwhile, investors are bombarded with
cynical advertising from the large discount brokerage firms, which straightforwardly tell them
they can beat the market if they sign on to churn
their own portfolios. Even babies can supposedly
beat the market with the right trading tools.
All of these visibly harmful channels of
advice are not only legal, but even respected in
our society. In aggregate, these various frauds
and subtle dishonesties get far more attention
debate is about
level playing fields
But, in fact, what
is at stake is
TIME FOR NEW RULES
In just a few days, voters around the country will go to the polls to
select a president as well as representatives in Congress. When the
dust clears, we will almost certainly have a new SEC chief, a newly
constituted legislature and a new opportunity to revisit the fiduciary
debate. Our regulators — FINRA, the Financial Planning Coalition and
various groups — will finally go into the endgame. By the time the
snow melts off northeastern lawns, some combination of these groups
will decide how we are going to impose a fiduciary standard on the
November 2012 Financial Planning 29