Over the years, I have written a lot about the benefits of using a fiduciary standard in building a great practice-not just for profitability, but also for the quality of the relationships you can develop with your clients, staff and peers. I am still a staunch fiduciary advocate, but I now think something more is needed.
Since 2007, I have been researching the links between leadership and fiduciary governance. I even left the industry for 18 months to accept an assignment to head the newly established Institute for Leadership at the U.S. Coast Guard Academy so I could immerse myself in the research. I thought our work in this area was just about complete until I came across the book Stewardship: Lessons Learned from the Lost Culture of Wall Street, by John G. Taft, the CEO of RBC Wealth Management (U.S.). Taft points out that the current economic crisis was a failure of stewardship (if it had been the result of persons breaking the law, or even breaching their fiduciary responsibilities, we would be sending people to jail).
Google the term "stewardship" and 95% of the hits will be associated with environmental and spiritual themes. Taft makes the cogent argument that stewardship also has a place on Wall Street: It is, he says, "the key to saving ourselves from the ongoing financial crisis and creating a more stable and more compassionate financial system."
Stewardship is the opposite of ego and greed, the root causes for most of the problems we have on Wall Street and the primary reason for the breakup of most business partnerships. Even if the SEC and DOL were to promulgate new fiduciary regulations, these would likely have little impact on the systemic problems associated with ego and greed.
Simply defined, "stewardship" is the acceptance of ethical and moral responsibility. It may be for a person, place or thing. In contrast, a fiduciary accepts legal responsibility. Clearly, the two terms need to be paired if we want to define successful client outcomes. Furthermore, I would suggest that with these two terms we should integrate the concept of leadership, for it is leadership that will have more impact on a long-term client relationship than any other factor.
The intersection of leadership, stewardship and fiduciary governance is best defined as "the point of triangulation," the point which marks the coordinates of a higher, professional standard of care.
There are three key dimensions to the point of triangulation:
Integrity. It's not enough to be honest; you must also have the courage to stand up to those who are being dishonest or who attempt to deceive or mislead. Ego and greed are the root causes of most maladies on Wall Street, but so are legal devices intentionally designed to obfuscate: Obtuse and lengthy contracts, service agreements and disclosures have become the prosthesis for open and honest communication; they breach the covenants implied when you serve in a leadership or stewardship role.
Good governance. Advisors must develop a simple framework for finding the client's true goals and objectives and ensure that every involved party is aware of his or her roles and responsibilities. Good governance is not only consistent with fiduciary requirements; it is also a critical component of effective leadership and stewardship.
Steadfastness. I define this as striking the proper long-term balance between the needs of your clients and your need to build an efficient, compliant and profitable practice. If you burn out, or if you lack the profitability to add needed staff or technology, then you will not be able to serve your clients effectively. If you aren't able to act in the best interests of your client, then you have not only breached your fiduciary duties, but your leadership and stewardship responsibilities as well.
Survey after survey reveals that most clients do not understand the difference between a fiduciary standard and a suitability standard. Furthermore, they don't care. What they care about is that they trust their professionals, and that their professionals are well informed. Such a relationship is best defined, again, in terms of the point of triangulation-the point where leadership, stewardship and fiduciary governance intersect.