More than 15 years ago, the Financial Planning Association embarked on a passionate campaign to create and to enforce “The Fiduciary Standard,” which simplistically states that “customer interests shall be first,” a minor variation of The Golden Rule.
It is the only national advocacy campaign ever mounted by the FPA. It probably cost hundreds of thousands of dollars for professional representation, writing and publishing brochures, advertising, such as a full-page in The Wall Street Journal, and legal fees. At the time, the FPA board appeared unified and one-minded, giving no distribution of dissenting internal views and denying my request to make a twenty-minute personal board presentation at my expense.
My view had two elements. The first was that the Financial Planning Association had no standing to legally force changes in rules adapted to major brokerage firms. It could not and did not prove competitive disadvantage. Instead, the federal law suit should have been prosecuted by investors and investor-protection groups that potentially could prove losses caused by providers. A corollary belief was that our efforts would unproductively split the financial services industry. The Wall Street Journal advertisement affirmed this difficulty. In effect, the ad said “we are better; we are fiduciaries. They are not.”
The second element was that business morality cannot be legislated, that the jerks among us will continue to be jerks regardless of rules and regulations.
A court incorrectly decided that financial planners did have standing to sue, thereby imposing new procedural and disclosure requirements on a broad spectrum of providers. In the first year following the court’s decision, large firms implemented massive new paperwork asking clients to sign multiple documents and to renew their signatures annually. Disclosure requirements increased exponentially because of this court decision. Monthly statements increased in size and weight from simple presentations of financial activity to numerous pages with small-print disclosures. Today, one-third of the pages of my monthly statement from a large firm contain small-print disclosures, repeated over and over, and never read. The ineffectiveness of these disclosures has grown as statements are delivered on-line.
The fiduciary standard is a plausible impossibility. It sounds terrific until details are considered. For example, if an investment banking firm purchases then resells a tax-exempt municipal bond to investors, whose interests are primary, the school district selling the bonds or the investor who acquires them? The same is true for new underwritten mutual funds and common stocks. The question of who should bear risk is not answered by the standard. The confusion and disputes between competing interests have not been decided: After 15 years of trying, no consensus has appeared. This confusion and division of interests has produced a split in the financial services industry, and probably has contributed to the mediocre membership numbers of the FPA as various competitors now view it only as a narrow-interest trade group instead of a group dedicated to professional improvement of its members.
(While this was being written, the Department of Labor was nearing publication of a “fiduciary” rule for advisors to retirement plans. The rule is likely to have exceptions, and to require extensive new paperwork and compliance staffs. In this case, the increased paperwork will be borne by financial planning firms serving individual retirement accounts and retirement plans.)