March 9, 2016
The Bull Session
Tell the Truth, Be Proud of Who You Are
There is a fiduciary debate raging in Washington these days. Most people I talk with don’t really know what a fiduciary is, so it is not surprising that the debate has not taken the entire country by storm. But maybe it should. More people are investing than ever before and less of those people really understand how the markets work. Even more importantly, they don’t understand what type of advice they are getting when they ask for help. The world of investing professionals has never been murkier than it is today. The vast majority of investment professionals sell products that pay money to the people who sell them. The investment professionals that sell those products have a duty to the firm that pays them to work for the interests of the firm. They work under a standard of care called the suitability standard. They must offer investments that are suitable for the client, but they don’t have to be an investment the client actually needs. There is also no requirement to monitor those investments over time, so that duty rests with the investor that purchased the investment.
Then there is a smaller group of people who work under a fiduciary standard of care. The fiduciary standard requires the adviser to act in the best interest of the client, even if it is not in the best interest of the firm. It also requires the adviser to continually monitor the investments they buy on their clients’ behalf.
Those two standards are pretty simple to understand, but it used to be easier to tell the difference between who used the suitability standard and who used the fiduciary standard. For instance, stock brokers are under the suitability standard as are insurance professionals and bank brokerages. The term investment adviser used to be reserved for fiduciaries, but no longer. Back in the 1990’s it seems that the industry realized that investors wanted to work with people called advisers or consultants…so it became commonplace to see those names pop up on business cards for a lot of the product sellers.
The blurred lines of the title of adviser is where the fiduciary debate comes in. It seems that most investors think that their investment professional is supposed to act in their best interest when, in fact, most don’t have that requirement. So the government is pushing to require everyone to become a fiduciary. Especially those investment professionals that work in the retirement sector where mistakes can be devastating.
On the face of it, becoming a fiduciary seems like a reasonable thing to do, but I do see some unintended consequences from shutting down the suitability side of things. And I think that, in our effort to protect investors from all bad things, we have looked past the bigger issue. For years the governing bodies of our industry have watched firm after firm mislead the public in their advertising and marketing efforts. Time after time we hear firms talk about how the investor comes first and your goals are their goals when, in fact, that is just not true. I don’t mean that they wish ill will to their clients. I mean that their goals are not aligned. I believe in the fiduciary standard, but I see a place for the suitability standard as well. Before we make such a fundamental change it seems that we might first try to enforce a simple rule. “You can’t go around misleading people about what you do!” Tell the truth and be proud of what you do. Let’s try that first, it just might work.
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed, LLC