Honest Talk about Fiduciaries
Next week, January 21, 2011, the SEC is due to deliver its report to Congress, as required by the Dodd-Frank Act, on the standards of conduct applicable to registered advisors and broker/dealers. There is little doubt that this report will recommend a uniform standard — ostensibly, a fiduciary duty. My greatest concern is that they will in fact adopt a unified standard and that they will trumpet fiduciary principles, but in reality it will amount to nothing more than a diluted version of fiduciary principles.
The lobbying by Wall Street has been intense. Once the recommendations are made, the lobbying will get even more intense. Wall Street’s business model is at stake. This guarantees a watered down result.
In fact, the directives given by Congress to the SEC effectively preordained a diluted notion of fiduciary duty. On the one hand Congress raises the prospect of a unified fiduciary standard, but on the other, also makes provisions for brokers to continue to sell propriety products provided there is sufficient disclosure of compesantion arrangements and conflicts of interest. This is disappointing.
Simply put: commissions and disclosure are not consistent with fiduciary principles.
Fiduciaries are subject to a duty of loyalty. This duty requires that a fiduciary put client interests first, not engage in acts of self-dealing nor involving conflicts of interest. Earning commission income from the sale of proprietary products clearly raises the potential of acts of self-dealing and conflicts of interest. A fiduciary’s actions should never be clouded by acts of self-dealing.
Congress believes that disclosure will serve as the bulwark against acts of self-dealing. In other words, if a broker discloses potential commissions, as well as how the commissions might impact his compensation, then the broker is “off the hook” from a fiduciary perspective.
Here, Congress is simply mistaken. While disclosure is the corner stone of the securities laws, it does not hold the same weight as far as traditional fiduciary principles. Under the securities laws, whether it is corporations or mutual funds, the underlying theory is that material facts need to be disclosed and investors can then exercise their own judgment based upon the facts.
For a fiduciary, however, the prohibition is fairly straight forward. No acts of self-dealing. A fiduciary cannot use its fiduciary discretion to engage in acts of self-dealing. And, a fiduciary cannot disclose the potential self-dealing and obtain the client’s consent.
I focus on commissions and disclosure because it serves as a perfect example of how fiduciary principles will be watered down. For those of us who believe that fiduciaries have a critical role to play in our financial system, this is a disappointment. The marketing machine of Wall Street has the potential to dilute our commitment to longstanding principles.
At Harrison Fiduciary Group, we categorically reject efforts to masquerade self-dealing and conflicts of interest. Our business model is structured on a fee for service basis. Our fiduciary judgment will not be clouded by the potential to earn additional compensation.