“Some people will only support you after it’s proven to be a success. They are the same people who will say ‘I told you so’ if it doesn’t work.”
Source: www.ronedmondson.com

Fiduciary, as a “movement,” is coming to an end. Like a wave, the movement already has crested and rolled on to the beach. As in nature, the subsequent wave (movement) already has formed and is absorbing the energy that has dissipated from the preceding wave of the fiduciary movement.

Semantics are critical: In this column, it is important that you note when we are talking about the “fiduciary movement” versus “fiduciary standards.” The movement is coming to an end, whereas there will be an increase in the number of persons who will become subject to a fiduciary standard.

With regard to forthcoming fiduciary standards, they will not be the same as those that were advocated during the movement. A simple picture may be in order: During the movement, we defined fiduciary as a gold standard for those willing to be subject to a fiduciary standard—a higher standard defined for a few. Moving forward, under the proposed uniform fiduciary standard, more persons will be subject to a fiduciary standard, but it will be a de minimis, or bronze, standard (see Figure 1).

The purpose of this column is to trace and recount the history of the fiduciary movement before its colorful past is subsumed by the legalese of forthcoming regulatory changes. To help illustrate, I’m going to reference the Innovation Curve (formally referred to as the “Diffusion of Attributes Curve”) developed by Everett Rogers in 1962. The curve is extremely helpful in depicting the rate of adoption for new and creative ideas and concepts. (See Figure 2.)

Referring to the curve, we should label the start of the fiduciary movement as the early 1980s, with some of the first innovators being Eugene Burroughs, Charles Ellis and John Lohr—if I have missed anyone, my sincere apologies in advance. I count these three men as my writing mentors for they heavily influenced my thinking when I wrote my master’s thesis on the subject of fiduciary responsibility in 1987.

Likewise, I would peg 1987 as being the cusp of the Early Adopter phase, which would last until approximately 1999. The Early Adopters were the advisors and trustees who endured our initial fiduciary training programs—when we were training only about 100 advisors a year. Of particular prominence were financial planning leaders like Harold Evensky and numerous partners from the Big Six CPA firms (when there were six). Clark Blackman was one of the first CPAs to adopt the fiduciary standard and he is still active with the movement today.

From a best practices standpoint, this phase is punctuated by the PC, which made it possible for advisors to begin to replicate the same fiduciary services being offered by the institutional consulting firms. We were able to move asset allocation software, money manager databases and performance reporting software off of mainframe computers and onto the PC. We also saw a proliferation of no-load investment products and the launch of independent RIA warehouses by Schwab, Fidelity, TD Ameritrade (Jack White) and Pershing. The warehouses were the incubators for future fiduciary advocates and leaders.

During the Early Adopter phase, there was marginal interest in the movement from the Bar Association and the Department of Labor—there was virtually no interest from the SEC. Overall, lawyers didn’t take note of the movement during these formative years since there was little legal substantiation for the standard of care we were advocating. The analogy we would use is that the fiduciary standards of that time were like stick figures—you could make out the basic structure, but little else. Those of us involved with the movement saw the opportunity to put muscle, skin and hair on the stick figures and bring the subjects to life.

Also during this phase we began speaking on the practice of applying a fiduciary standard when an advisor was providing comprehensive and continuous investment advice and/or financial planning. I suspect we visited nearly every FPA chapter between 1987 and 2007 to spread the message. It would take 20 years—two decades—of hammering away at the CFP Board before it finally swung around and adopted the fiduciary standard.

Reverting back to the Innovation Curve, the Early Majority phase was next. I would define this time period as 1999-2007. Highlights of this phase include the founding of the Foundation for Fiduciary Studies; the publishing by the foundation of Prudent Investment Practices, which was the first handbook on fiduciary practices; and the development of the first formal courses on fiduciary responsibility, which were offered in affiliation with the University of Pittsburgh. This also was the time of Enron, WorldCom and a host of other fiduciary-related scandals. The word “fiduciary” finally made it to the front page of nearly every newspaper, and colleges began to list “fiduciary” as one of the top 100 terms incoming freshmen should know. It was also during this phase that we decided to launch the professional designations AIF and AIFA to help the public identify those professionals who had an understanding of how to apply a fiduciary standard of care.

The players who stood out during the Early Majority phase were money management firms like Thornburg, which began to sponsor fiduciary training programs for advisors. To date, Thornburg has sponsored more than 1,200 advisors. The DOL also began to show interest in the movement and in 2003 selected me to serve as an advisor on the Erisa Advisory Council. It was during this time with the DOL that we began to advocate for a uniform fiduciary standard—to align the fiduciary standards being defined by the DOL with those of the SEC. In 2005, we trained the directors of the Federal Retirement Thrift (the largest defined contribution plan in the U.S.), and in 2007 testified before the U.S. Senate Finance Committee about fiduciary practices associated with the use of alternative investments and private equities in retirement plans.

From a best practices standpoint, the Early Majority phase was heavily influenced by the Internet and the development of online and cloud-based tools that supported a structured fiduciary process. Firms like Actifi, Fiduciary Benchmarks, FRA Plan Tools and the Center for Fiduciary Management all got their start during this period and continue to make advancements in this space. In 2005, Cefex (Centre for Fiduciary Excellence) was launched to provide an ISO-like assessment process for fiduciaries. Unfortunately, this initial effort failed and Cefex closed its doors in 2007.

I’d say we reached the tipping point of the fiduciary movement in 2006 when the first full-length movie correctly used the term “fiduciary” during a pivotal scene. (The movie was Failure to Launch, starring Sarah Jessica Parker.)

2007 marked the beginning of the Late Majority phase—we’re now on the backside of the curve. Both the FPA and the CFP Board adopted the fiduciary standard; the SEC finally got on board and conducted its RAND study on whether the public can discern the differences between a fiduciary and suitability standard. Unfortunately, 2007 also marked the year that the Foundation for Fiduciary Studies came under attack by fi360. The legal battle would last for 42 months, culminating in a federal lawsuit being filed by fi360 against the foundation. A saying comes to mind: “Do you know the difference between pioneers and settlers? The pioneers are the ones with the arrows in their backs.”

That brings us to today—the beginning of the Laggards Phase—the end of the movement characterized by:
• The arrival of regulators, followed in tow by lobbyists and legislators. I remember my first meeting with the SEC in 2001. Following the meeting, a senior official pulled me aside and counseled me: “Stay out of Washington—you’ll be able to have more impact on the industry.”
• Fatigue—in this case, fiduciary fatigue. So much has been written and discussed that the average advisor has grown tired of the debate.
• No new best practices. Each phase of the fiduciary movement has been marked by the introduction of a host of new best practices. I can’t think of any new best practices that have been introduced since 2007.
• No new questions—little depth to answers. The fiduciary movement has been reduced to a single sound bite: “The best interests of the client.” Though a true and important statement, the mantra fails to capture the breadth, depth and essence of the movement. We conducted a fiduciary impact survey with Financial Advisor magazine in 2012 to determine whether advisors who acknowledge a fiduciary standard actually provided their clients with the practices normally associated with a fiduciary standard. The results of the survey—40% of fiduciary advisors do not provide their clients with the requisite standard of care.
• The loss of inspiration. In the beginning, most movements are sparked by a point of inspiration. Unfortunately, as a movement becomes more popular, the spark is often snuffed out by those motivated primarily by ego and greed.

I don’t want to end on a sour note. A lot of great things have come out of the movement. Consider the fiduciary best practices that are now fully integrated into the typical retirement and wealth management platform. And think of the bad practices—such as pay-to-play schemes and soft-dollar abuses—that have been exposed and for the most part mitigated as a result of the movement.

One final comment about movements: You can’t lead from the backside of the Curve. Those of you who are looking to serve in leadership roles within the financial services industry need to look toward the next wave, the next movement. That next wave is the “Leadership and Stewardship Movement.” 

Donald B. Trone, GFS, (Global Financial Steward) is the President of the 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.