Building Fiduciary Standards Into Your Wealth Management Practice

The fiduciary rule may fade away, but the fiduciary principle is eternal. The arc of investing is long, but it bends toward fiduciary duty.”

- John C. Bogle, New York Times Op-Ed , February 9, 2017

Fiduciary Principles Aren't Optional to Clients

The six-year-long battle over the implementation of Obama administration's Department of Labor Fiduciary rule appears to be nearing its end with the demise of the rule itself. But, as Vanguard founder and retired CEO Bogle's quote above shows, your investors' demands that their wealth advisors rise to the ethical standards the rule imposes won't die.

In fact, Bogle argues the rule doesn't go far enough —it should protect all investors, not just retirement fund holders.

Like nearly every other industry in America, clients in the wealth management industry are demanding firms become client-centered to retain the opportunity to manage their assets. Firms should not be, as Bogle states, sending the message to client-investors that, “We put your interests second, after our firm’s, but it’s close.”

You clients want those they entrust with any of the precious assets, whether they’re retirement funds or not, to work in their best interests.

Clients See Ethics as Part of Your Role

Even your smartest clients don't know or want to learn the rules that you as their wealth manager are supposed to follow diligently. Naturally, they see that as your job—something they pay you to do.

Spectrem Group learned that many investors don't know the fundamental differences between a "broker" and "advisor" or "adviser." What they do know is, in an industry notorious for its bad actors , they expect wealth advisors to be ethical all the time, whether there's a fiduciary rule or not.

Research shows investors are willing to switch advisors who don't meet their needs. Spectrem Group's 2015 study proved that over 60% of high- and ultrahigh-net-worth respondents changed advisors during their lives. So did 51% of less-wealthy mass affluent wealth management clients.

In a marketplace where investors are not well-supported, that's little surprise, and those numbers could be higher. Much has happened in the regulatory environment that has changed wealth management client expectations of their advisors, especially since January 2017. The protracted battle is only solidifying client-investor determination that change is imperative.

Post-Obama Courts, Current Administration Don't Back Investors

One of Donald Trump's priorities as president became a DOL review of the fiduciary rule , which he ordered on February 3, 2017, halting its start date. Trump expressed his skepticism that the rule helps investors rather than hurts the economy—and wealth management firms. Senate Republicans voted to void the Obama-era rule even before Trump ordered its review.

His administration supported the review, delaying the rule's implementation 18 months , despite the ongoing cost to retirement savers of stalling the rule's effective date.

After that spate of regulation implementation delays far beyond the original April 10, 2017 to July 1, 2019, the 5th Circuit Court of Appeals in New Orleans vacated the fiduciary rule holding it constituted "unreasonableness."

In the March 15, 2018 , 2-1 split decision, the court also affirmed the arguments of the plaintiffs, who filed the suit to overturn the rule. The court asserted DOL's administering the rule represents "an arbitrary and capricious exercise of administrative power."

Investors Versus the Wealth Industry?

The Obama administration's objective was protecting retirees from what its research showed were excessively high advisor fees that eroded retirement savings. The fiduciary rule would force wealth managers, brokers, planners, insurance agents and any others working with retirement plans and accounts to exercise the highest standard of care, to act with fiduciary duty , with each investment client.

Rule proponents were confident that imposing the fiduciary standard against all working with retirement fund investors—whose accounts comprise over 50% of America's financial assets —they'd get compelled to put best interests first. Advocates like AARP, Better Markets, Fund Democracy , Consumer Federation of America and others argued it would curtail profiteering by advisors focused more generating the highest commissions than clients' needs.

Opponents of the rule include the U.S. Chamber of Commerce, the Securities Industry Financial Markets Association, Financial Services Institute, the Financial Services Roundtable and the Insured Retirement Institute.

Detractors have argued, among other things, that DOL didn't have jurisdiction over retirement accounts because most get obtained through employers. It's the Securities and Exchange Commission and the Financial Industry Regulatory Authority (FINRA) that should continue to oversee industry rulemaking and create more uniform fiduciary regulations, they insisted.

Related: Increase Revenue by Increasing Diversity

Two Distinct Industry Narratives

Lobbyists contend the rule is onerous, confusing, and subjected advisors to litigation that would increase costs for advising clients. That would price most less wealthy investors out of the advisory marketplace, they said. They seemed to be making Trump’s assertions.

However, staffers for Senator Elizabeth Warren (D-MA) conducted reviews of second quarter 2017 earnings calls found institutional leaders made different representations of their readiness to comply with the rule. They stated they were "well-prepared" for the rule's implementation and didn't find the rule overly burdensome.

Executives representing companies on these calls are deliberate about what they say during them since, as Warren correctly stated, "…publicly traded companies are required by law to accurately share all information pertaining to material matters affecting their business models or stock valuations."

Multiple Advisors Support Fiduciary Ethics

The opposition faces pushback from those inside their industry, albeit from those they consider smaller players. Some of the fiduciary rule's staunchest supporters are individual financial advisors along with industry association, the CFA Institute . They believe ethics should be standard thus see incorporating fiduciary principles into their practices as a "client first" business imperative.

They recognize that client retention, especially with intergenerational wealth transfers on the rise and expected to be $30T over the next generation, is challenging enough.

Fighting the perception of widespread dishonesty by financial advisors and advocating for updated regulations that combat the behavior is imperative for them.

The Pope Chimes In

On May 17, 2018, the Pope released a bulletin with a lengthy title in Italian from the Holy See for the Catholic faithful.* The Pope criticizes some investment advisors' behavior as "morally questionable" for not acting in the best interests of clients, rather "offering instruments of saving, which, compared with some banks, the product of others would suit better the needs of the clients.”

He also refers to, "malicious negligence on the part of financial [advisors] regarding the protection of related interests to the portfolio of their clients.” The Pope supports the fiduciary rule as a move toward what he believes should have been the outcome of the Great Recession or a new economy, more attentive to ethical principles, and a new regulation of financial activities that would neutralize predatory and speculative tendencies and acknowledge the value of the actual economy.”

States and Senate Dems Fight Back

States also continue their battle to protect consumers. Some enacted regulations to prevent more losses to their citizen's retirement funds and others keep engaging in court action.

When the 5th Circuit blocked three states' attempt to intervene in the DOL ruling on May 2, 2018, New York, California and Oregon filed a motion for reconsideration asking the court to rethink its decision. They made the motion arguing, "The federal government is no longer pursuing this appeal."

Critics called the motion "a longshot," and it appears the 5th Circuit agreed, denying the motion for reconsideration on May 22, 2018.

Meanwhile, Senate Democrats sent a letter to DOL Secretary , Alexander Acosta, on May 17, 2018, pushing for SCOTUS scrutiny on the fiduciary rule.

As the Rule Faces Defeat, Others Arise

The 5th Circuit Court appears to agree with opponents of the fiduciary rule about its legality. It hasn't issued a mandate to date that entirely vacates the rule, which means the fiduciary rule is still in effect .

However, other agency's and the DOL are proposing rules that weaken the Obama-era rule leaving investors with no real protection, according to advocates.

However, on April 18, 2018, The SEC proposed its 1,000-page Regulation Best Interest to confront the conflicted investment advice from brokers the Obama administration found in 2015 cost investors $17B annually .

Its rule precludes brokers from calling themselves advisors or advisers , which brokers sometimes informally use to identify themselves professionally. Though that's a formal title that comes with more disclosure requirements, SEC's broker conduct plan doesn't define BIC or fiduciary or who should get called advisor or adviser.

Meant to support FINRA, which already imposes the fiduciary standard on 3,800 brokerage firms, the SEC proposal may cause more confusion between the two, say some industry experts.

Then, on May 7, 2018, DOL issued an apparent advisor rule , but it doesn't go far enough to protect investors according to fiduciary rule advocates.

These efforts on their face appear to increase responsibility by wealth managers to clients and opponents have pronounced the Obama-era fiduciary rule nearly dead.

But are American investors willing to allow the wealth industry to operate in a less principled manner that imposed by the fiduciary standard? How will they respond to industry leaders rescinding changes they'd made in anticipating compliance with the beleaguered rule?

A Changed Investing Environment

An outcome of this conflict over protecting American investors' saving for retirement using investment vehicles is your clients got more got educated. Ongoing media attention and a public information campaign about the fiduciary rule by advocates persuaded investors there are fundamental differences between fiduciary advisors and those without that legal responsibility.

That transformed the investing marketplace into one where investors began demanding their advisors make changes that protected their interests. Despite the ruling by the 5th District Court and its denial of AARP and three states' attempt to intervene in the ruling after DOL failed to appeal it, investors may win after all. But, they'll do it by advocating for themselves.

They'll demand you incorporate advocate-defined fiduciary principles into your practice and even become a voluntary fiduciary . They know there are alternative wealth advisors to those who won't embrace this new investing environment. Organizations that make it easier for investors to find certified fiduciaries are launching. Many investment firms have begun to make the transition investors now expect practices to undergo.

Forward-thinking wealth management firms see this permanent shift in the investment industry as an opportunity rather than a threat and are making changes to stay competitive . They recognize the real danger is losing client accounts to those who have transformed their firm into one that places wealthy client interests above their own.