Five Core Principles of the Authentic Fiduciary Standard 

• By KATHLEEN M. McBRIDE

A group that includes leaders in the investment industry, The Committee for the Fiduciary Standard, has called on Congress to “adopt an authentic fiduciary standard in Wall Street reforms,” and offered “five core principles” of the fiduciary standard to help individual investors understand the differences between the investment advisors' fiduciary standard and brokers' "suitability standard." (This editor is a member of the Committee.)

 The five core fiduciary standard principles are:
·        Put the client’s best interests first;
·        Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
·        Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
·        Avoid conflicts of interest; and
·        Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

The Committee aims to raise the awareness of regular investors about the differences between investment advisors, who must abide by the fiduciary standard, putting client’s interests ahead of their own and fully disclosing and managing conflicts, and broker/dealer registered representatives who use a suitability standard which does not mandate putting client’s interests ahead of their own. Broker/dealer reps currently are bound to put their firm’s interests, not their customer’s interests, first.

To show support for the authentic fiduciary standard, the Committee is urging investors and financial industry professionals who agree with putting investor's interests first to sign a petition registering that point of view and calling Congress to put investors’ best interests first.

And the Committee has invited two leading securities attorneys, Thomas P. Lemke, Managing Director & General Counsel of Legg Mason, Inc., and Steven W. Stone, Partner at Morgan Lewis & Bockius in Washington DC—who favor “a harmonized standard,” to debate the issue with members of the Committee. 

Recently, the Obama administration (the Plan), SEC Chairman Mary L. Schapiro (speech), SEC Commissioner Luis Aguilar (speech) and Vanguard’s John Bogle have all called for the fiduciary standard for everyone who gives investment advice to individual investors.

U.S. Congressional Representatives George Miller (D-California), and Robert Andrews (D- New Jersey) have introduced a Bill, H.R.2989: 401(k) Fair Disclosure and Pension Security Act of 2009,  that would mandate fair disclosure of the real costs associated with 401(k) retirement accounts, and require that advisors to retirement accounts and individual participants be fiduciaries.

On July 10, the Treasury sent “proposed legislation” guidelines to Congress for new laws that “give the SEC authority to require a fiduciary duty for any broker, dealer, or investment adviser who gives investment advice about securities, aligning the standards based on activity, instead of based on legal distinctions that are no longer meaningful.” Read the proposed "Investor Protection Act of 2009," here. 

"A Fiduciary Society"

Not long ago, investment industry statesman John Bogle, founder and former CEO of Vanguard, said in remarks to the Investment Advisor Compliance Summit in Washington DC, that over the past half-century America has moved from an “ownership society” to an “agency society”—“ownership” in the sense that individuals owned stocks, and “agency” in the sense that, more recently, money management institutions own and trade them.   

Now, Bogle said in that March 13, 2009 speech, “Building a Fiduciary Society,” the current economic and markets catastrophe is the catalyst for a change to a different model: “The present crisis is, in important measure, a reflection of that change, and it gives us the opportunity to build, out of the ashes of our failed agency society, a new fiduciary society in which the interests of the investors who put their capital to work come first.”

As he put it so eloquently in his speech, citing the origins of fiduciary duty in British common law eight centuries ago: “The fiduciary acts at all times for the sole benefit and interests of another, with loyalty to those interests. A fiduciary must not put personal interests before that duty, and must not be in a situation where his fiduciary duty to clients conflicts with a fiduciary duty to any other entity.”

While he is not a member of the Committee, Bogle’s remarks do concur with the Committee’s view, "the fiduciary industry standard must be extended to other financial advisors, including broker-dealers who elect to act as advisors.”

The Committee’s members are: Blaine Aikin, fi360, Clark Blackman, Alpha Wealth Strategies, LLC, Gene Diederich, CEO, Moneta Group, Harold Evensky, Evensky & Katz, Sheryl Garrett, Garrett Planning Network, Roger C. Gibson, Gibson Capital, LLC, Matthew D. Hutcheson, Independent Pension Fiduciary, Gregory W. Kasten, Unified Trust Company, Fred Reish, Reish, Luftman, Reicher & Cohen, Ronald W. Roge, R. W. Roge & Company, and Knut A. Rostad, Rembert Pendleton Jackson. 

This topic has generated a great deal of healthy discussion. WealthManagerWeb.com invites your comments to continue the conversation. Please send them to kmcbride@wealthmanagerweb.com.

Kate McBride  is editor in chief of Wealth Manager and a member of The Committee for the Fiduciary Standard.

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• • 7/18/2009 12:59:19 PM
  • L Chambers
  • response to the breaking news
  • Kate I’m cynical about this because news that advisor groups are joining force seems like much-to-do-about-nothing again. First, big Wall Street firms have no motivation to make changes or make concessions. I’ve been waiting to see these new proposed fiduciary rules for years? When the SEC declares that brokers are fiduciaries then I will get excited. Second, I know everyone wants to raise awareness, which sounds fine, but until we start using word people can understand rather than the legal language that is steeped with concept nouns linked together in long drawn-out sentences – word combinations like fiduciary suitability leave people unconscious and sounds like so much Mum-bo-jumbo. Third, I would rather see legislation written in a simpler language like; Any real person (whatever is on his/her business card, who makes their living either; managing, trading, or investing someone else’s money, savings or investments; no matter if that person money is in cash, stock, bonds, or any tradable asset; held inside a qualified plan or even a nonqualified plan, is subject to the authority of SEC. Lastly, I would substitute the five core principles of authentic fiduciary standards with the Cub Scout oath because the language is a bit stronger. I promise 1. To DO MY BEST 2. To Do my DUTY to GOD (or a higher power - you declare that one) 3. To Do my DUTY to My Clients 4. To HELP other people, and 5. To OBEY the LAW of the Pack. I am glad you are a member of the committee maybe we can get something done Best Larry Chambers
• • 9/16/2009 4:01:18 PM
  • w rooney
  • i will believe it when i see it
  • it takes a big person follow his/her own ethical standards if they work in the world of finance. the game is legally rigged to benefit the seller of products. its plain and simple: until the rhetoric is backed by significant reform, financial institutions will continue to work the system. unfortunately, the government doesn't carry as big a stick that it thinks as by the time any serious reform actually occurs, the financial gurus have figured out how to dodge any new changes. 12b-1 is a great example of how to work the system.
• • 9/18/2009 3:28:18 PM
  • James S. LeBaron
  • Five Core Principles of the True Fiduciary Standard article
  • Kate, I enjoyed reading your article, however I am concerned that advisor's are wrongly interpreting the proposed legislation solely as a way to even the playing field with broker/dealer registered reps. In your article you state (I think incorrectly) that "Broker/dealer reps currently are bound to put their firm’s interests, not their customer’s interests, first." Bound how & by whom? Successful advisors and reps would not be in business if they did not put their clients' interest first. While wirehouse firms certainly try to strong arm reps into products and services that pay the firm more, the majority of successful reps and advisors alike are focused on one thing - doing a good job for their clients. Advisor's and reps know where their bread is buttered and go to work hard everyday in their clients' best interest. Without their clients, advisors and brokers are out of business and in this environment it is increasingly difficult to find and retain clients. I agree with the committee's suggestion of pushing for a fiduciary standard for all who give advice to investors. This will help increase the professionalism and, most importantly, the quality of advice given to investors. What is missing, however, is the same standard for the management / leadership of the investment firms. Without holding management of Wall Street to the same standard to which advisors / reps will be held, the status quo will prevail. I think you would agree that in the current financial crisis as well as during the tech bubble that the primary cause of investor losses wasn't that advisors or reps pushed product on their clients because they were paid a higher fee. The primary cause of investment losses came from the executive board rooms where decisions were made that were in the best interest of the company / management and not in the best interest of their retail clients (or their advisors / reps). To wit, Wall Street managers leveraged their companies 40 to 1; they securitized subprime debt and turned it into triple A via financial alchemy; during the tech bubble management provided 'buy' recommendations for investment banking clients which differed from the real opinion of the analyst (so much for the 'Chinese Wall' between investment banking and research). Another example which rings true in most wirehouse firms has to do with wrap mutual fund accounts. The firm puts together diversified portfolios of mutual funds based on the client's risk tolerance but the mutual funds that are included in the wrap program all pay the firm a fee (which the advisor / rep doesn't participate in & probably isn't aware of) to be a part of the wrap program. The advisor / rep can follow the Five Core Principles but be unaware of additional payments the firm receives from mutual fund companies or managers. This obvious conflict of interest can only be removed at the firm level because it is above the advisor / rep's pay grade. There are many more examples but I think you understand my point. Because of these and other parallel issues, I think we (advisors and reps) are on the wrong track in supporting the Investor Protection Act of 2009 in its current form. On page 4 of the Act it recommends language requiring the advisor / rep to, "act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice." It seems that most advisor / rep trade & advocacy groups assume that this will lead to a standard similar to the fiduciary standard that advisors currently adhere. I think advisors and reps should insist on a better definition. Acting solely in the best interest of the client could be at odds with what the client wants to do. What should the adviser / rep do when the client rejects sound financial / investment advice that is in the client's best interest? The only choice at that point is for the advisor / rep to fire the client and while altruistic I don't believe that is a practical solution. Any RIA or rep who has practiced in this business has, at one time or another, heard the client say, "it's my money, I'll do what I want." Without a more detailed definition in the Investor Protection Act of 2009 advisors / reps could be put in a no win situation. The other unnerving portion of the legislation is the recommendation that the commission can "examine and, where appropriate, promulgate rules prohibiting sales practices, conflicts of interest, and compensation schemes for financial intermediaries (including brokers, dealers, and investment advisers) that it deems contrary to the public interest and the interests of investors.” That seems a scary proposition in this day & age with what we are seeing in Washington. The client determines our compensation and if advisors / reps are following the Five Core Principles then there is no need for a bureaucrat to have the ability to determine or change our compensation. We all can appreciate the need for better regulation / oversight - difficult economic times seem to demand it. However, the regulation needs to be well placed and targeted to attack the weaknesses that allowed the economic collapse. The problems that caused our current economic problem as well as the last begin in the boardrooms of Wall Street. Until they too are held to a fiduciary standard retail investors will always be at a disadvantage - and advisors / reps will continue to be the scapegoat. Kind regards, Jim James S. LeBaron