For years, Ron Rhoades has traveled the
country-side, lobbied government regulators and, in general been a de facto
spokesman for the adoption of a universal fiduciary standard. He’s written
papers, published blogs and led panel discussions at conferences from sea to shining
sea. He’s been the Shining City on the Hill, a bright beacon by which the
righteous and pure could confidently steer their corporate vessels. And his
consistent message of Fiduciary Duty proved no mere rhetorical device, for he
once fell on his own sword for its sake.
So it was with great surprise when, speaking before a packed
audience at the monthly FPA chapter meeting in Rochester, New York, a
“Flash!!!” blazed across the PowerPoint slide and Rhoades admitted, “As a
pro-fiduciary advocate, I am (nearly) ready to concede defeat.” He then offered
these predictions to the stunned audience: The DOL’s new Fiduciary Rule will
not apply to IRAs and the SEC will offer a “New Federal Fiduciary Standard.”
This new standard would include the same suitability standard as currently
practiced by non-fiduciaries but with “casual disclosure” requirements added
on. In Rhoades words, this would be a “FINO” – a “Fiduciary In Name Only.”
How did we get to this point on where we go from here? Rhoades,
who serves as Program Director of the Financial Planning Program at Alfred
State College, offered his insights on the winners and losers, challenges and
opportunities wrought from “The Fiduciary Wars.”
First, he described the two sides in this long battle – the
suitability standard vs. the fiduciary standard. He likened the former to an
“arms-length relationship” whereby the salesperson or distributor placed
themselves between the product manufacturer and the customer. Although this is
a classic “caveat emptor” situation, the sales folks do have several
obligations, including not to lie, cheat or steal, as not to misrepresent the
product; not to affirmatively disclose (unless imposed by statute or
regulation); and, to only offer what is “suitable” to the client (i.e., the
products don’t have to be the best).
The fiduciary standard, on the other hand, places an adviser in
between the client and the product suppliers. It’s built on a relationship of
trust. The elements of trust include: 1) being an expert; 2) due care; 3)
acting in the best interests of the client; 4) loyalty; 5) complete honesty and
candor; and 6) acting in utmost good faith.
This battle centers around one behavioral focal point – how does
the adviser act when a conflict of interest is present. Fiduciary advisers
immediately and affirmatively disclose material facts; they then ensure client
understanding by obtaining informed consent; and, they continue to act in the
best interests of the client.
Rhoades emphasized this last bit. He repeated “disclosure does
not negate continuing fiduciary duty to act in the best interests” of the
client. He added “it is fundamental that a client will not consent to be
harmed.”
How has the SEC responded on this battlefield? They, as well as
Congress, talk the talk but don’t walk the walk, according to Rhoades. He
pointed out the “SEC said… Let’s raise ‘the standards of those on the edge to
the level of the standards of the best.’” He also told the group a senator once
said “Let this new organization promote ‘truly professional standards of
character and competence.’” Despite this lofty prose, the SEC today will
neither apply nor enforce the fiduciary standard already on the books. Rhoades
explained that, “despite limits on estoppel and waiver in fiduciary law… [the]
SEC permits firms to: negotiate to not be a fiduciary; and, disclaim core
fiduciary obligations.
Although he admits he’s nearly ready to concede defeat, the
defeat of which Rhoades speaks may be likened to more of a single battle than
the entire war. He implies the battle to win the hearts and minds of the
regulators and politicians appears to have been won by the deep pocketed
industry lobbyists. The real way, however, isn’t in Washington or on Wall
Street, it’s on Main Street. To that end, Rhoades has developed a concept he
calls the “Bona-Fide Fiduciary” (or “BFF” for those young hipsters out there).
He says “BFF’s will distinguish themselves via the Consumer Checklist.” He
could foresee a day when a public service campaign tells investors to “Ask your
adviser these questions and get the answers in writing.”
Already, Rhoades sees BFFs making inroads. While an industry
sponsored study claims billions of dollars in retirement assets will leave
brokers if the DOL’s proposed Fiduciary Rule were to include IRA, Rhoades says
what the industry doesn’t tell you is that it’s really a migration already
taking place. He cites Cerulli research which shows, from 2011 to 2014, the
wirehouse market share in IRA Rollovers has fallen from 41% to 34% while the
Fee-Only RIA (i.e., fiduciary) market share has risen from 12% to 14%.
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