Who can you trust when it comes to managing your money, especially your retirement savings?
Sad to say, trust is in short supply in finance. Confidence in the economy’s commanding heights has taken a beating following a long, depressing litany of scandals and malfeasance. Think Enron, WorldCom, Bernie Madoff, the global credit crunch, the housing boom and bust, robo-signing foreclosures. Trust isn’t easy to measure like land, labor, and capital, but trust is critical to a well-functioning financial system and economy.
That’s why I don’t understand the opposition by large segments of the financial services industry to an initiative designed to bolster investor protections. The Dodd-Frank financial reform law authorized regulators to raise investment advice standards. Regulators would like to require finance professionals in the private retirement market to offer advice in the client’s best interest, the so-called “fiduciary” standard.
Investment advisers are held to the fiduciary standard, while others, such as stockbrokers and insurance agents, aren’t. Their advice must be “suitable” for clients, a lower professional standard. The new rules would require brokers to disclose conflicts of interest to potential clients. Unfortunately, the U.S. House has voted to delay the new rule. The effort to water down standards continues.
The best definition of a fiduciary I’m aware of came in a famous 1928 opinion by U.S. Supreme Court Justice Benjamin Cardozo: “Many forms of conduct permissible in a workaday world for those acting at arm’s length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive is then the standard of behavior.” Seems like the right gauge for judging the advice of those dealing with our retirement money, no?
Numerous studies highlight that many investors assume that their adviser is legally bound to act in their best interest. A Rand Corp. survey in 2008 found that investors typically referred to their finance professionals by generic titles such as adviser, financial adviser and financial consultant. But some advisers are fiduciaries; others aren’t.
To be clear, a fiduciary requirement is only a minimal, baseline standard. The main advantage of the shift would be that investor expectations and assumptions would be aligned with the legal and marketplace reality. A fiduciary standard is no guarantee of a professional’s competence. Investors still must do their homework researching and investigating financial professionals.
The political outcome of the high-stakes lobbying struggle over standards remains uncertain. In the meantime, I like the list of “Mom and Pop and apple pie” commitments for finance professionals suggested by Harold Evensky, certified financial planner and president of Evensky & Katz Wealth Management:
• I will put your best interests first.
• I will act with prudence; that is, with the skill, care, diligence and good judgment of a professional.
• I will not mislead you and I will provide conspicuous, full and fair disclosure of all important facts.
• I will avoid conflicts of interest.
• I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.
Sounds right to me.
Chris Farrell is economics editor for “Marketplace Money.” His e-mail is firstname.lastname@example.org.