I was recently attending a meeting at the historic Thayer Hotel, which sits on the grounds of the U.S. Military Academy at West Point. In the hotel lobby is a framed poster of West Point’s Cadet Honor Code. It reads simply: “A cadet will not lie, cheat, steal, or tolerate those who do.”
At the U.S. Coast Guard Academy, where I graduated, we had a similar code, so I am very familiar and comfortable with the words. However, what caught my eye at West Point were three “rules of thumb” printed under the code to help cadets decide whether they are taking honorable actions. They must ask themselves:
1. Does this action attempt to deceive anyone or allow anyone to be deceived?
2. Does this action gain or allow the gain of a privilege or advantage to which I or someone else would not otherwise be entitled?
3. Would I be satisfied by the outcome if I were on the receiving end of this action?
Leave it to cadets to teach us what fiduciary responsibility is all about.
People who deceive or attempt to deceive are the key reasons the public puts so little trust in our industry. They’re also the reason the fiduciary movement is stuck in the mud. We have only to consider a number of people and practices that plague the industry. These would easily be caught by the academy’s rules of thumb:
Pay to play. Consider this infectious and debilitating disease that was pandemic in the financial services industry up through 2005. The way this works is that a consultant, professional association or financial services firm selects service providers according to the amount of money the service provider is willing to pay to be included in a select universe. The selection is not, in other words, based on merit.
It took a number of Securities and Exchange Commission and Department of Labor actions, a well-publicized lawsuit against a major investment consulting firm, and the 2003 mutual fund scandals to finally bring the practice under control.
Pay to play undermines the integrity of the industry. Yet it now appears to be creeping back, to be more virulent than before and to include a fiduciary strain.
Obtuse disclosures. These are conflict disclosures buried in thick documents for only one reason—to deceive the recipient about what is being disclosed. The longer a contract or agreement, the more likely there are one or more points of deception buried in it. It takes only a few words to speak the truth or to reach an honest agreement. Perhaps that’s why the Dodd-Frank Act has 383,013 words.
Indulgences. This term was used in the Middle Ages to describe the Catholic Church’s practice of selling trinkets (“indulgences”) to remit the punishment of a sinner. The dark side of the Dodd-Frank Act is the emergence of organizations selling “fiduciary indulgences,” organizations primarily interested in the commercial exploitation of the fiduciary movement. So advisors must make sure the “fiduciary experts” they work with are truly independent, genuine and authentic. These experts must be professionals who have done academic research on the subject of fiduciary responsibility. They must have been professionally published and have had their expertise recognized by regulators and the courts.
Faux fiduciaries. This warning is a corollary to those about obtuse disclosures and indulgences. The faux fiduciary uses legal devices to cover up past and present fiduciary breaches. We’re seeing more and more stories about honest professionals who challenge the unethical practices of bad organizations. These people often have oppressive lawsuits or arbitration cases filed against them, forcing them to submit to settlements and promise never to tell anyone about the organizations’ infractions.
It’s All Related
What pay to play, obtuse disclosures, indulgences and faux fiduciaries all have in common is “deception.” These activities involve attempts to deceive the industry and get the public to believe something that’s not true. “Trust me, I’m a fiduciary.”
I recently read an article by Amy Rees Anderson in Forbes, “Success Will Come and Go, But Integrity is Forever.” Besides the Cadet Honor Code, her article was one of the inspirations for this column.
“Avoid those who are not trustworthy,” she writes. “Do not do business with them. Do not associate with them. Do not make excuses for them. Do not allow yourself to get enticed into believing that ‘while they may be dishonest with others, they would never be dishonest with me.’ If someone is dishonest in any aspect of his life, you can be guaranteed that he will be dishonest in many aspects of his life.”
“After all,” she continues, “if a person cannot be trusted in the simplest matters of honesty, then how can they possibly be trusted to uphold lengthy and complex business contracts?”
When we began drafting fiduciary practices in the 1990s, each was designed to be consistent with legislation, regulations and case law. But in the aggregate, these practices were intended to define a higher professional standard of care than what could be delineated by law. We did not use words like “trust,” “honesty” and “integrity” in the first drafts because we didn’t have to. It was understood we were defining a professional standard that was intended to be straightforward and above reproach.
We can’t say that today. We now have to contend with individuals and organizations attempting to commercially exploit fiduciary standards by using deceptive practices.
Donald B. Trone, GFS, is the president of the newly constituted Leadership Center for Investment Stewards, and is the founder and CEO/Chief Ethos Officer of 3ethos. He is the former director of the Institute for Leadership at the U.S. Coast Guard Academy; founder of the Foundation for Fiduciary Studies; and the principal founder of fi360.