It doesn’t make sense to try to define a uniform fiduciary standard for all brokers and advisors; to do so will only institutionalize mediocrity. Consider the following:
• Does it make sense to allow a novice—someone who has just passed their Series 7—to serve in a fiduciary capacity? A fiduciary is expected to judge wisely and objectively. Is it reasonable to expect that a novice can meet the requirements of a discernment standard? (I credit David Bellaire, general counsel and director of government affairs for the Financial Services Institute, for raising this point.)
• Does it make sense for a master—someone who has technical skills, experience and competence in a particular field—to be constricted by rules as opposed to being guided by principles?
• Does it make sense for a broker who is not interested in engaging clients on a continuous and ongoing basis to be subject to a fiduciary standard?
• Does it make sense for an advisor who wants to broaden and deepen client relationships to be constrained by rules?
For the past six years, we have been engaged in research looking at the effectiveness of decision-makers serving in critical leadership roles. This new body of research is called LeaderMetrics. In turn, we have applied LeaderMetrics to get a better understanding of how a fiduciary standard is linked and impacted by leadership and stewardship.
We feel that we have just scratched the surface with our research; however, we have peeled away enough to see that there is a need for, at least, a three-tiered advisory structure (Figure 1).
We have based our findings on observations of how three overlapping factors—engagement, experience and ethos—can be used to define the unique attributes of a broker, advisor and steward.
We have constructed scales that score a decision-maker on each of the three factors. The engagement scale measures how a decision-maker prefers to work with clients. We have developed a separate survey that consists of paired words or phrases. The decision-maker is asked to identify which word or phrase best describes his or her preference when working with clients. From these survey results, we can plot where a decision-maker falls on the scale. A decision-maker’s rank on the experience scale also considers his knowledge and competence and is based on a self-assessment. We use the same terms that have been used for centuries to differentiate levels of experience—novice, journeyperson and master.
The ethos scale measures the decision-maker’s view toward his role as a leader and steward. “Ethos” is an ancient Greek word that means the manifestation of a person’s character, competence and courage. (In contrast, when defining the ethos of an institution, we would say that it is a continuum of the institution’s leadership, stewardship and governance.) We have observed that great decision-makers (and institutions) always have a well-defined ethos.
The scores on the three factors are then averaged and plotted on the LeaderMetrics scale to determine the decision-maker’s preferred role when working with clients (Figure 2).
Most decision-makers fall into the advisor/trustee ranges, and for this group, a uniform fiduciary standard will make sense. However, when we consider the unique attributes of a steward, it’s clear that a uniform fiduciary standard will have the effect of institutionalizing mediocrity.
Consider the same LeaderMetrics scale being displayed as a series of pyramids: one representing the governance hierarchy as we know it today, and the second representing what a governance hierarchy would look like under a uniform fiduciary standard (Figure 3).
Rules require the least amount of discernment and are defined to constrict conduct. Next are regulations, which are intended to control conduct. At the risk of oversimplifying the hierarchy, I left out legal requirements (trustee) that normally would be one step above regulations. At the top are principles, which require the greatest amount of discernment and are defined to guide conduct. Notice the natural progression as we move from rules, which constrict, to regulations, which control, to principles, which guide.
The leaders of the fiduciary movement have centered their debate around a principle: “The best interests of the client.” Principles appear at the top of the pyramid. In contrast, the broker-dealer community has argued for a harmonization of rules—the lower portion of the pyramid. As it stands today, it appears that the broker-dealer community is going to prevail. If so, at some point in the future we will have a uniform fiduciary standard consisting largely of rules, and the uniform standard will fall within the lower portion of the governance hierarchy. There will be a significant gap between the uniform fiduciary standard and what we refer to as stewardship. There will no longer be a progression between professional standards; there will be the masses who are subject to a uniform fiduciary standard and the industry elite who will voluntarily adopt the higher stewardship standard.
The argument against one uniform standard becomes even more pronounced when the LeaderMetrics scale is viewed in two dimensions. The first dimension is the constant variable, “governance”—rules, regulations and principles. The second dimension is the three changing variables—engagement, experience and ethos.
The first two-dimensional view of the LeaderMetrics scale is engagement and governance. (Figure 4)
It would make sense for a decision-maker who does not prefer to have ongoing and continuous client relationships to serve as a broker who is governed by a set of rules. In the same vein, it would not make sense (it would be “dysfunctional”) to require someone who prefers not to work directly with clients to be guided by a set of principles.
Likewise, it does not make sense for a decision-maker who is comfortable serving in a leadership and stewardship role (to be fully engaged with clients) to be constricted by rules and regulations. Rules and regulations are the bane to ethical discernment and moral courage.
The second changing variable is experience. (Figure 5)
It would make the most sense for a novice to serve as a broker who is governed by a set of rules. It would not make sense (it would be “dysfunctional”) to expect that a novice could be governed by a set of principles.
Likewise, it does not make sense for a master to be constricted by rules and regulations. Rules and regulations define only the minimum requirements for the conduct of business; they are not written to define a professional standard.
The third changing variable is ethos—the manifestation of a decision-maker’s character, competence and courage. (Figure 6)
It would make the most sense for a decision-maker who does not have a defined ethos (never considered their leadership and stewardship role with clients) to serve as a broker who is governed by a set of rules. It would not make sense (it would be “dysfunctional”) to expect that a decision-maker who does not have a well-defined ethos to be governed by a set of principles.
Likewise, it does not make sense for a decision-maker with a well-defined ethos—who thinks and acts like a leader and steward—to be constricted and controlled by rules and regulations. As we saw with the governance hierarchy, principles define higher standards of care and behavior than rules and regulations.
In closing, we need to reconsider the wisdom of subjecting every broker and advisor to a uniform fiduciary standard. Almost certainly, a uniform standard will be a de minimis standard defined by rules. Novices will find the uniform standard daunting; masters will find it demeaning. Rather than serving as a professional standard, a uniform fiduciary standard will likely be nothing more than a series of boxes that will have to be checked before someone advises retail clients. Ignoring the differences among brokers, advisors and stewards—subjecting everyone to a uniform fiduciary standard—will likely have the effect of institutionalizing mediocrity.