Sunday, November 24, 2013

The Danger of Indifference and the Demise of the Fiduciary Standard

Remember that all through history, there have been tyrants and murderers, and for a time, they seem invincible. But in the end, they always fall. Always.” - Mahatma Gandi

We find inspiration from quotes such as these. As Americans we adore those who accomplish great deeds, especially where they may be viewed as underdogs. We take inspiration from their successes.

And, through other quotes, we remind ourselves, on occasion, of America's greatness. We applaud our own devotion to liberty, freedom, capitalism, and democracy. We surmise, from time to time, that America has been hugely successful in the past, and that through the indomitable America spirit we have conquered huge obstacles which have threatened, from time to time, our liberties and - at times - America's very existence.

But we should not rest on our laurels, for it is not from without that America will fail. Rather, it is from our own indifference that we are likely to see our downfall. In this regard, I quote the great Abraham Lincoln: "America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.”

There is currently underway a comprehensive campaign to deny Americans of the trusted financial and investment advice they so deserve. In recent decades Wall Street and the insurance companies have reaped the benefits of a massive extraction of rents from individual investors. Their high level of profits - and indeed their entire business model - is under attack. From the fiduciary standard.

How does Wall Street respond to the world's movement toward a new era of fiduciary capitalism? With a massive lobbying effort in opposition to same. Millions of dollars of campaign contributions. Secretive promises of future high-paying jobs for legislators, their aides, and even members of government agencies. Hundreds of visits by influence-peddlers to members of Congress, the SEC, the DOL, the Treasury Department, and many more.

Wall Street spins its tales of fictional woe wildly, yet effectively. Distortions of the truth abound. And, through concerted effort, Wall Street's conspirators seek to redefine the fiduciary standard as something far less.

As citizens of this great country, do we care about Wall Street's transgressions? Are we willing to sit by and idly permit the fiduciary standard, a primary restraint upon greed when there exists a great disparity in knowledge between advisor and client, to be recast as a lower standard? Are we willing to accept a "new federal fiduciary standard" - as promulgated by Wall Street - which permits, through mere casual disclosures of conflicts of interest, which disclosures are neither read nor understood by individual investors, abuse of our fellow citizens to continue to occur? Are we willing to accept that "fiduciary" will now only mean "suitability plus a little disclosure"? Are we willing to stand idly by when a centuries-old standard of conduct is eviscerated?

And, consequentially, are we also willing - via our own indifference - to deny for investment and financial advisors their collective future as a true profession, grounded upon service to the public interest and with devotion to a bona fide fiduciary standard?

The application of the fiduciary standard to the delivery of personal investment and financial advice is so very important - to the future of Americans, and of America itself. 

  • The adoption of the fiduciary standard of conduct for all providers of investment advice to individual investors and retirement plan sponsors will assist in restoring trust to our financial services industry, resulting in greater investment of capital by individual investors. As the cost of capital is lowered, this in turn will propel a new era of economic growth in our country, leading to new job creation and new opportunities for all.
  • Moreover, the adoption of the fiduciary standard is essential to our fellow Americans who are saving and investing for retirement. While Wall Street’s excessive rents will diminish under the application of the fiduciary standard of conduct, the fees and costs associated with retirement account investing will also diminish. Our fellow citizens will, as a result, possess a far greater balance in their retirement accounts in future years. This will come at a time when federal and state and local governments, constrained by debt, will be unable to provide additional services to those of our citizens who have failed to adequately save and invest for retirement. In essence, the application of the fiduciary standard of conduct will remove a future burden upon government, and lower tax rates in the future will be possible.
I submit to you that the fiduciary principle should not be compromised by the forces of Wall Street. It should not be recast as a form of the suitability standard. Rather, it must be upheld, for the sake of all Americans.

We must remember the words of another great American: “We in America do not have government by the majority. We have government by the majority who participate.” ― Thomas Jefferson

The fiduciary battles continue in Washington, D.C. The economic forces which oppose the true fiduciary standard are powerful and influential. Those who favor the fiduciary standard possess only logic and truth in making their voices known.

During these battles, it is important to possess grit. It is important to persevere. It is imperative to not be worn down by the delaying tactics of the opponents of the true fiduciary standard.

Only you can make a difference. Write to your U.S. Senators. Write to your U.S. Representative. Write to all five of the SEC Commissioners. Write to the Secretary of Labor. Support the bona fide fiduciary standard of conduct. Act now, not later.

Be a participant in our great democracy. Be heard. While it is still possible for the voice of professionals, and individual investors, to be heard. Share your stories - your own personal observations of the strength and benefits of the true fiduciary standard.

In this issue, your voice is important. But only if you choose to speak, to write, and be heard. Do not falter. Be heard.

Saturday, November 23, 2013

Is Ken Fisher Correct? Will RIAs Disappear?

In a Nov. 21, 2013 article at ThinkAdvisor, entitled "Ken Fisher Warns: RIA World Gone in 10 Years," (see, Mr. Fisher opines in part:

All the features of the potential fiduciary standard, including mandatory arbitration elimination, are likely to backfire and blow back — maybe fatally — on the naïve RIA world. BDs will likely subsume and exterminate the RIA world because the BDs would like to take it over: Money has been coming out of BDs and going into RIAs for 40 years. The RIA world has been growing rapidly at the expense of the BD world. And the BD world hates that.

Is Mr. Fisher correct? If the SEC, acting pursuant to Sect. 913 of the Dodd Frank Act, imposes broad fiduciary standards upon broker-dealers (BDs) and their registered representatives (RRs) who provide "personalized investment advice," is this the death knell for RIAs?

In a sense, probably ... yes. In another sense ... no.

The Current State of Affairs. Since the 1970's the SEC and FINRA have undertaken a series of wrong decisions which permitted brokers to transition from providing trade execution services to providing comprehensive financial and investment advice. I have written extensively, previously, on the decisions by FINRA and the SEC which led to this dismal current state of affairs (see, e.g.,, and my prior blog posts) and I will not repeat that history here.

Yet, as will be seen, the BDs have already, through actions permitted to occur by this regulatory agency, the SEC diminished the fiduciary standard of conduct, and in so doing have subsumed the reputation of all fiduciary advisors.

Who's "Best Interests" Are Being Looked After?

There is no question that, today, BDs are providing a large volume of personalized investment advice. And there is no question that the vast majority of consumers believe that they can "trust" their BDs and RRs to act in their best interests.

Yet, despite assertions by BDs (and even by their industry lobbying organization, SIFMA, and by their membership "self-regulator," FINRA) that they do in fact act "in their client's best interests," nearly any objective observer would dispute such a conclusion. It is clear that most BDs and their RRs continue to sell highly expensive investments, often choosing those products which pay them additional fees (through higher 12b-1 fees, payment for shelf space, receipt of soft dollar compensation, and even payment for order flow - although this latter practice is de jure banned).

Indeed, BDs and RRs possess limited obligations to disclose the fees and costs of the products they sell. And their obligations to disclose and quantify their compensation are even more limited.

In essence, massive fraud occurs. While many BD firms and their RRs state that they act in their client's best interests, the reality is that most act only in the self-interest of the BD firm and their RRs.

Contrasting Suitability and the Fiduciary Standard of Care. The suitability standard is frequently applied to the provision of such advice, at least in many of the decisions of FINRA-approved arbitrators. This suitability standard relieves BDs and their RRs of the duty of care in recommending mutual funds and other pooled investment vehicles - a duty nearly all other service providers possess. Instead, the obligation of BDs and RRs under the very low suitability standard is, essentially, to not allow their clients to purchase products which are dynamite - i.e., "blowing up" each and every time. The weak suitability standard fails each and every day to protect consumer interests.

In contrast, the fiduciary standard requires extensive due diligence of the firm and individual providing personalized investment advice. While a prudent investment portfolio is not required to be employed for every client, there must be clear disclosure of the fact that a particular recommended portfolio is not prudent. Additionally, a full explanation of the risks, fees, and costs, are required of the fiduciary advisor.

Disclosing Away the Fiduciary Obligation: Permitted by the SEC and FINRA. In recent years we have seen the rise of the dual registrant - i.e., securities industry participants who are registered as both registered representatives and investment adviser representatives.

Under a strange and bewildering 2007 proposed regulation, the SEC permits BDs and their dual registrants to wear "two hats" at the same time, for the same client - despite centuries of fiduciary law which indicate that the fiduciary obligation extends to the entirety of the relationship between advisor and fiduciary.

Moreover, the SEC also permitted, in that 2007 proposed regulation, dual registrants to "switch hats," seemingly at will. Of course, few clients understand such a change in role, and such a switch from a fiduciary role (in which trust can be placed in the fiduciary) to a non-fiduciary role (in which caveat emptor - buyer beware - is the mantra customers should observe) often occurs without the understanding and informed consent of the client. (One would question if any client would concur with a switch in role of his or her advisor from a fiduciary to a non-fiduciary, if they were truly understanding of the consequences of such a switch.)

The ill-founded 2007 proposed SEC regulation has found its way into a couple of reported court decisions. In essence, the SEC's rules have influenced, adversely, the development of the federal common law in this area, and these rules and federal court decisions will likely filter down and diminish the fiduciary standard applied to relationships of trust and confidence when state common law is applied.

Even worse, however, is the proposition - seemingly accepted by the SEC (as evidenced by the questions posed in its March 2013 Request for Data in connection with Sect. 913 rule making) that "disclosure" of a conflict of interest, without more, is all that is required of a fiduciary advisor. Such a stance may come from a wishful (by BD firms and their legal counsel) misinterpretation of the SEC vs. Capital Gains decision, which I previously written about in this blog. (See

The result, over the years, has been the facilitation by the SEC and FINRA of the denigration (and potential demise) of the fiduciary standard of conduct applied to those who provide personalized investment advice. This was illustrated through my recent examination of the investment advisory accounts for the client of a large BD / dual registrant, where numerous abuses were shown to exist (See

Of course, much more is required of a true fiduciary when a conflict of interest is present. Not only must full and complete disclosure be made of all material facts (with the "truth laid bare"), but the advisor must subjectively ensure that the client understands these disclosures and their ramifications. This will lead to the client's informed consent (if it is given). Even then, fiduciary law requires that the transaction remain substantively fair to the client. For it is a basic premise of fiduciary law involving the fiduciary duty of loyalty that no client will ever knowingly consent to be harmed.

Sound like a tough standard? It is. Indeed, the "best interests" fiduciary standard applicable under state common law and the Investment Advisers Act of 1940, correctly applied, is not too far removed from the "sole interests" fiduciary standard found under ERISA. In essence, few conflicts of interest should exist between the fiduciary and its/his/her client - a point made loud and clear by the U.S. Supreme Court in its seminal 1963 SEC vs. Capital Gains decisions, as well as other decisions by both federal and state courts over the past several centuries. Best practices dictate the avoidance, or at least minimization, of conflicts of interest by those providing personalized investment advice.

Recent Developments in Washington, D.C. As a frequent traveler to Washington, D.C. this past year, I have observed many "ups" and "downs" in the fiduciary battles taking place.
  • We saw the appointment of a new SEC Chair and two other new commissioners, bringing back hope that a majority of the Commission might favor a bona fide fiduciary standard during future rule making on the delivery of personalized investment advice by brokers. Yet, Chair Mary Jo White has not revealed her personal stance on the issue.
  • The House of Representatives voted on a bill which would have effectively halted the DOL's "Definition of Fiduciary" rulemaking. This bill would also have made the SEC's economic analysis required before rule-making so difficult that it would be highly unlikely that the SEC would proceed.
  • Further delays were seen to the DOL's fiduciary rule-making efforts. At one point, many Democratic Senators were on record in opposition to the Phyllis Borzi's steadfast effort to apply fiduciary obligations upon all providers of investment advice to defined contribution plans and to IRAs.
  • FINRA continues to quietly lobby for oversight of RIAs. And SEC Chair Mary Jo White has reportedly stated that inadequate oversight of RIAs is the one issue which "keeps her up at night."
  • For a while, it appeared that the anti-fiduciary advocates, with a huge amount of lobbying effort, were poised to reverse all progress made in the fiduciary battlegrounds since 2008. Yet, over the past several weeks, some positive developments occurred.
    • First, the Administration stated publicly its opposition to the House bill and threatened to veto same, effectively bringing an end (at least for now) to its consideration in the Senate.
    • Second, Phyllis Borzi has announced her intention to proceed with the EBSA's "Definition of Fiduciary" rule making, perhaps in early 2014.
    • Third, an advisory committee to the SEC recently released its report in support for application of the fiduciary standard to BDs (when providing personalized investment advice to retail consumers).
Where do we stand now? Ken Fisher, if he were to read the foregoing, might observe that I am way too optimistic. Indeed, he recently stated: "If you’re an RIA, you’d better get un-naïve: the RIA world is at threat of being taken over by BDs in a regulatory sense. There’s a good chance that the entire RIA world is gone in 10 years. The SEC doesn’t seem to understand what it’s doing."

In a sense, I concur with Ken Fisher. Why?

First and foremost, a huge lobbying effort is underway by Wall Street firms and insurance companies, and their many hired lobbyists, to sway not only Congress but the Administration, the DOL, the SEC, and other agencies to their views. Those who seek to lobby for the application of a bona fide fiduciary standard are outnumbered, in terms of visits to Senators, Congressmen, and agency representatives, by a factor of at least 20 to 1, and perhaps much more.

Second, Wall Street and the insurance industry is poised to pour a great deal more money at this issue. The already huge monies we have seen flow into Washington, D.C. from these industries will likely pale in comparison for what is to come. Wall Street knows that the application of a true fiduciary standard would destroy their highly profitable, high-intermediation-costs business model, and they will throw their full weight behind their opposition to a true fiduciary standard.

Third, the SEC's 2007 proposed rules and the SEC's lack of oversight and enforcement of investment advisory account practices today (particularly those housed with dual registrant firms), have essentially bought into the proposition that one can negate the application of fiduciary standards through agreement with the client. In other words, the client can - by "consent" (which is altogether neither adequately informed nor evidencing of any real understanding by the client) waive a dual registrant's fiduciary obligations. This result may have occurred via "regulatory capture" of the SEC, by means of the "revolving door" which is permitted to exist. Lobbying by Wall Street also plays a significant role.

The late Justice Benjamin Cardoza, who so long ago warned against the "particular erosion" of the fiduciary standard, has now rolled over in his grave.

What we have now, in reality, is not a bona fide fiduciary standard at all. Rather, it is close to the "new federal fiduciary standard" touted by SIFMA and its many allies, who purport to "manage" conflicts of interest "through disclosure." Again, this is despite the long-understood legal principle that disclosure, alone, does not negate a fiduciary's obligation of loyalty; under the law "waiver" and "estoppel" have little application to the core fiduciary obligations of a trusted advisor.

Fourth, FINRA - the big gorilla (who only wants to get bigger) lurks. Even if a bona fide fiduciary standard is restored, it remains highly likely that FINRA (with the extensive lobbying by itself, as well as its member firms) will obtain oversight of RIAs. We cannot expect that an organization which has failed, for over seven decades, to raise the standards of conduct of its members, will suddenly transform and embrace a true fiduciary standard. Rather, FINRA is an organization which serves not the public, but its member BD firms, and it will use its rule-making powers and influence at every turn to seek to prevent the application of the fiduciary standard, or so weaken it that the fiduciary standard becomes a meaningless footnote in the to-be-written history of securities regulation.

Fifth, what if the SEC does not apply fiduciary obligations upon BDs who provide investment advice, as is certainly possible? What is the result if two different groups provide the same services under different standards of conduct? As explained many decades ago by the Nobel-prize winning research of economist George Akerloff, in his paper The Market for Lemons, a "rush to the bottom" occurs. Simply put, those operating under a lesser standard of conduct are able to extract greater rents from their customers. As a result, securities industry participants who do not possess a strong personal ethos migrate to the non-fiduciary platform. The fee-only, fiduciary advisory community remains small, in comparison.

Indeed, if the SEC does not act to apply fiduciary obligations upon BDs who provide the same essential services as investment advisers (and who can argue with the fact that 12b-1 fees are "investment advisory fees in drag), one might question why we would continue to have registered investment advisers at all. Why not just repeal the Investment Advisers Act of 1940 (and all of the similar state acts)? It won't be long before this argument will be made by Wall Street, particularly if there is a more receptive Congress and Administration in future years.

"My B.F.F." Yet, I foresee that fee-only and other true fiduciary advisors, who seek to avoid (not simply disclose) conflicts of interest, and who receive much-deserved professional-level compensation for their expert advice, will still exist - even if all of the foregoing comes to pass.

Yet, true fiduciary investment advisors will have to work harder to distinguish themselves. In fact, they may need to call themselves "BFFs" - not "best friends forever" in the language of instant messaging, but rather "bona fide fiduciaries." Through interview checklists and educational materials these BFFs will continue to educate consumers, and they and the media will guide consumers in increasing numbers to true fiduciary advisors, such as those found in the National Association of Personal Financial Advisors (, the Garrett Planning Network (, and the Alliance of Cambridge Advisors (

Still, forces may arise which will lead to the destruction of bona fide fiduciaries ("BFFs"). As Ken Fisher observed, Wall Street does not like to see its market share decline. Hence, Wall Street's captured regulator, FINRA, will likely (after gaining oversight of RIAs) issue a host of new regulations, making it difficult for any RIA-only firm to survive. And, as seen in recent years with the decline of smaller BD firms under the weight of FINRA's rules, smaller RIA firms will find it difficult to stay in business. The cost of entry for new RIA firms will be entirely new high, as well, due to high regulatory costs and high capital requirements imposed by FINRA (even though many RIA firms will continue to not accept custody of client securities).

This, I believe, is the future which Ken Fisher observes.

We can only hope that Ken Fisher's vision, and the slide of RIAs toward oblivion, does not occur - for the sake of all of our fellow Americans who both need and deserve truly objective, bona fide fiduciary personalized investment advice. For the sake of capital formation unimpeded by dramatically high intermediation costs. For the sake of the future of the American economy, and America itself.

The Scholarly Financial Planner blog is a creation of Ron A. Rhoades, JD, CFP(r). Ron writes in his personal capacity, and not as the representative of any organization nor firm nor institution with whom he is associated.

Ron serves as the Program Chair of the Financial Planning Program at Alfred State College, Alfred, New York, where as an Asst. Professor in the Business Department he teaches advanced financial planning courses and business law. For more information about Ron, please visit

Ron is the 2013 Chair of The Committee for the Fiduciary Standard ( He is a frequent writer and speaker on the fiduciary obligations of financial planners and investment advisers.

A Thanksgiving Mystery: The Tale of the Cake Corner Thief

For nearly 50 years my older sister, younger brother and I have gathered at my mother’s home for Thanksgiving dinner. Upon reflection, my mother’s life was hard as she raised three children, each with their own distinctive personality. Disputes were common, as I suppose exist in every family. Yet, each Thanksgiving, we children dutifully traveled “home to Mom’s” to gather for the feast, exchanged stories of our lives during the past year, recollected memories, and expressed our gratitude for all that we have been blessed with.
An early tradition, started before I can recollect, was the baking of a square pound cake by my mother. Out from the oven it would pop, usually early in the morning of Thanksgiving Day, in order that the huge turkey and stuffing could then dutifully enter the oven. The pound cake’s aroma would fill the house, making each of us even hungrier for the Thanksgiving meal and trimmings (and desserts) to come.
Yet, by mid-day, each and every Thanksgiving, an event would occur which would rock the up-to-then quiet gathering and throw us all into a state of bewilderment, excitement, and – dismay. The corner of the cake would disappear!
That’s right. Someone, and no one knew precisely whom, snuck into the kitchen at some point when the cooks were absent, and each time this bandit had cut off a small corner of the cake. Who was this courageous yet somewhat greedy burglar, we wondered?
My older sister, Terry, was always the forceful commandant of her two younger brothers. Terry played a large role in raising both me and my younger brother when my mother was, at times, working long hours. Hence, Terry, our “all-knowing” sister with a forceful personality, dutifully pointed her finger each time at my younger brother, John.
Of course, everyone thought, it had to be John! Throughout his life, my little brother John, six years my junior, has always been the mischievous one. A bundle of energy, he always managed to fit eight activities into each day, when everyone else was happy to partake in just a few happenings and outings. During each family gathering John always creatively came up with a new adventure – some new outing to a park or lake to undertake, or a family photo to gather and pose for. Now called “Uncle John,” his daughters, nephew and nieces adore him for all of the activities he schedules and the excitement he continues to infuse into every family gathering.
I naturally concurred with the guilt assigned by my sister, each and every time. Yes, no doubt, if anyone was to blame, it had to be John. Of course, my brother John denied guilt. But, having been such a rascal for so long, few believed him!
However, my mother was not so quick to cast blame. In her quiet wisdom she surveyed all of us, each time, casting her glance – as if the guilt of the “cake corner thief” would somehow reveal itself merely because my mother wished it. To my surprise, it seemed that each and every time my mother, when alone with me at some point during the day, would accuse me for being the culprit and robber of the lost corner of the cake – which of course I would vehemently deny to her. I was always the “good son” – quiet, studious, honest, and reliable were my traits. Naturally, such a crime could never be committed by one so devoted to hard work and integrity. The fact that my mother questioned me, each year, so inquisitively, always made me feel as if my mother did not appreciate one so pure of heart and mind.
Years later I discovered that my older sister, Terry, and younger brother, John, would also each experience separate interrogations from my mother, and each would steadfastly issue their denials. I felt relieved upon realizing that I was not singled out by my mother for such interrogations.
And so the “cake corner thief” saga continued, year after year, Thanksgiving after Thanksgiving, until a few years ago. For then … we caught the thief!
My brother, John and I, back from some adventure he had created for me, strode through the back door of my mother’s home in the late morning of one Thanksgiving. As we unexpectedly turned the corner into the kitchen, we caught our sister – red-handed! With knife in one hand, and a corner of the cake in another, she nearly jumped through the ceiling when my brother and I each shouted: “Aha!” A ruckus occurred, as my sister, Terry, tried her best to come up with an excuse. But it was too late. She had been caught in the act itself, and no denial could take place.
Upon hearing the commotion in the kitchen from her children, my mother arose from her comfortable chair in the living room and quickly traversed into the kitchen. My daughters, and those of my brother John, and my sister’s son, also ran into the kitchen. My mother, upon arriving, looked down at the cake, with its missing corner, and then looked (sternly yet with a wry smile) at each of us. My brother and I explained what had happened (necessary since our sister had already quickly consumed the evidence, although she was still in the act of swallowing the last morsel when my mother arrived). While my sister attempted to deny the entire event at first, soon she admitted to our mother her guilt on that day. Yet, strangely, she denied guilt for all of the cake corner thievery which had occurred over the decades, each prior Thanksgiving Day. (We didn’t believe her!)
My sister avowedly promised, in the presence of us all (including her five nieces and her son, all now gathered around the kitchen table, and all now well-aware of the Thanksgiving cake corner thief tradition), to never take a corner of the pound cake again. My sister is a proud, honorable and hard-working person; she has always been one to keep her word, once given. I, for one, believe her.
Since then, as our family continues to gather for Thanksgiving, every late Thanksgiving morning and within a few hours of the pound cake being baked a new mystery occurs. The corner of the cake still disappears!
Yet, I do not believe it is my sister this time. Rather, I believe a new, unknown perpetrator from the next generation has taken over the lifelong commission of the crime – one of my sister’s five nieces (now age 26 to 8 in age). Of course, it may be many years or decades before the next cake corner thief is ensnared and revealed to all.
As you gather with family and friends for Thanksgiving Day, take a moment to express gratitude to those you love, and to those who love you. Give them a long hug. Tell them how much they mean to you. Don’t allow the moment to pass.

And, as you build another fond memory of a gathering with friends and family this coming Thanksgiving weekend, beware the cake corner thief. For … you never know when I may strike!
      Travel safely, and Happy Holidays. - Ron Rhoades