President Barack Obama's remarks on Feb. 23 about the Department of Labor's re-proposed fiduciary standard are an excellent illustration of the two faces of a fiduciary standard. On the one hand, Mr. Obama singled out great advisers who are doing the right thing for their clients. He then changed his tenor and talked about advisers who are “selling snake oil.”
As I considered the president's remarks, it occurred to me that there are two faces to a fiduciary standard — positive and punitive — and it's critical that the industry be able to distinguish between the two.
The first face is positive. The presupposition is that advisers are honest and ethical and have the passion and discipline to protect the best interests of their clients. The purpose for defining a positive fiduciary standard is to provide the details on how advisers can improve their investment decision-making process. Let's inspire advisers to do even better. An example is the handbook, “Prudent Investment Practices,” written by the Foundation for Fiduciary Studies and published in 2003. (To view a copy of the handbook, open a search engine and enter the words “SEC fiduciary practices.” The handbook will be the first item shown. In the interest of full disclosure, I was the founder and president of the foundation.)
The second face is punitive. The presupposition is that there are advisers who are not honest and ethical, and who put their own interests first. The purpose for defining a punitive fiduciary standard is to define rules that will restrict or prohibit all advisers from certain activities. Let's define rules in terms of negative motivation — follow the rules, or face the consequences. A good example is the direction the DOL wants to go with its “conflict-of-interest” rule, which has been sent to the Office of Management and Budget. The DOL's mood is reflected in Secretary of Labor Thomas E. Perez's remarks, which followed the Mr. Obama's on Feb. 23.
This isn't right, and we have an obligation to fix it. Consumers deserve to know that their adviser is working for them. Common-sense rules can protect investors and consumers, prevent abuse and ensure that brokers and advisers provide advice that is in consumers' best interests.
Most of the fiduciary advocacy we have seen since the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed in 2010 is punitive. Different groups have been formed, each declaring or implying that only their members have a true understanding of what it means to be a fiduciary. Their messaging is negative: Join our church if you're a true believer, but sinners are not welcome.
The fiduciary movement started about 30 years ago. For the first 25 years, the objective was to define best practices associated with a positive fiduciary standard. The philosophy was simple and straightforward: A rising tide lifts all boats. If we can improve the investment decision-making process of investment fiduciaries, we can have a positive material impact on the fiscal health of our nation.
We've lost our way in defining a positive fiduciary standard. Fiduciary is no longer a point of inspiration for moral, ethical and prudent decision-making. If we don't act now, we're all going to suffer under a regime of negative motivation defined in terms of a punitive standard.
Don Trone, GFS, is the founder and CEO of 3ethos. He has been involved with the fiduciary movement for more than 28 years. He was the founder and former president of the Foundation for Fiduciary Studies, and was the principal founder and former CEO of fi360. He has authored or co-authored 12 books on the subjects of fiduciary responsibility, portfolio management and leadership.