Sunday, July 20, 2014

Evidence of Harm; Who Will You Choose to Be?

What I write here may mean nothing to the masses of the American people. The many entries in this blog are read by perhaps only a few thousand. Here I write mainly for those who are partisans for those in the cause of the fiduciary principle. Perhaps, on occasion, a few lines from an entry in this blog will be picked up by the industry press. But mostly the readers of this blog are those already involved in the fiduciary debate.

But our fellow citizens remained untouched, and largely unaware, of the public policy debates in which we engage. Americans toil in jobs and careers, seeking the freedom that comes from achieving the goal of financial security. They save. They invest. They seek to manage their tax burdens. They hope that they are acting correctly.

To assist them to achieve their goals, our fellow citizens turn to financial advisors. In this incredibly complex financial world, it is extremely rare indeed to find the individual consumer who does not require assistance from an expert, trusted advisor.

These consumers are vaguely aware that financial advisors are regulated and supervised. They are informed by their financial advisor that his or her advice will be “objective” and “in their best interests.” Some financial advisors go further, and tout that they are “fiduciaries” under the law.

But most of these “financial advisors” and “investment advisers” and “wealth managers” – however they are regulated – are not true fiduciaries at heart. They disclaim their core fiduciary duties. They place another piece of paper in front of the client and say, “Sign here.” Unwitting clients, wanting to trust their advisor, then permit their advisors to abrogate their core fiduciary duties, to engage in unwarranted conflicts of interest, and to receive additional compensation, often to levels wholly unreasonable.

95% of the time, true fiduciary practices are not employed by financial advisors. Consumers are subjected to a mere illusion of protection, nothing more.

I have seen the evidence of this harm.

I have seen hundreds of my fellow Americans possess investment portfolios that consist of highly expensive or risky investments. I have seen these portfolios designed with little consideration to proven investment principles and tax-efficiency. I have seen the attainment of the financial goals of my fellow Americans substantially delayed, and at times obliterated, as a result. I have seen the evidence of this harm.

I have seen hundreds of retirement plans possess extremely high fees and costs, despite the economies of scale which retirement plans can bring to bear on behalf of the plan participants. I have seen the retirement futures of millions of my fellow Americans circumscribed, as their retirement nest eggs are far less than that which is possible. I have seen the evidence of this harm.

I have seen hundreds of financial advisors who have no real training nor any expertise in providing personalized investment and financial advice. I have seen hundreds of financial advisors trained by consultants in how to develop relationships of trust and confidence with their customers, in order to be able to sell wholly inappropriate investment products to them. And I have seen hundreds of financial advisors who desire to “do the right thing” by their clients, yet be constrained by the restrictions imposed by their employers; they are forced to sell proprietary funds, engage in principle trades on unfavorable terms to the consumer, and they are restricted from offering the best investment products available (as these products don't provide, to their employers, payment for shelf space, soft dollars, 12b-1 fees, or other revenue-sharing arrangements). I have seen the evidence of this harm.

I am part of a community of investment advisors and financial planners. But I must admit - there is no reason for American consumers to trust us. Regardless of what title we utilize. Regardless of what certification or designation we possess. I am not a part of a “profession,” but only of a trade, deserving of no more respect than a used car salesperson.

The sad influence of Wall Street in Washington

It is wholly unclear if policy makers in Washington, D.C. are listening to the call for a broader and more correct application of the fiduciary standard. Congress, under pressure from Wall Street, seeks to influence the government agencies from the exercise of their authority. The Administration seems fearful to engage in combat with Wall Street and its tremendous resources.

Yet, there are a few dauntless souls, such as EBSA’s Phyllis Borzi and her staff. They realize that imposition of the fiduciary standard upon all providers of advice to qualified retirement plans and IRA accounts will secure for hundreds of millions of Americans a brighter economic future.

But powerful opponents exist. The courageous voices of Phyllis Borzi and her team, and consumer advocates, are drowned out by the estimated 3,000+ financial services lobbyists and the hundreds of millions of dollars they deploy to secure influence over Capitol Hill. Wall Street firms and their lobbyists will "do whatever it takes" and will "spend whatever it costs" to kill any broader application of the fiduciary standard.

Additionally, those few dutiful public servants who seek to protect individual investors are far outnumbered by other public servants who engage in the folly of the revolving door between Wall Street and government agencies. As a result of this revolving door, few leaders and staff of  government agencies are brave enough to advocate any restrictions which may be imposed upon Wall Street. They either possess allegiance to the firm and sales culture they came from, and/or they look forward within months or years to the promise of high-paying jobs on Wall Street or in the law firms or lobbying firms employed by Wall Street firms (as long as they don't "rock the boat" while serving in the government agency).

Indeed, I would observe that few of the current staff at the SEC believe in a bona fide fiduciary standard. Even if Chair Mary Jo White desires to proceed to reform Wall Street's practices in the delivery of investment advice, she appears surrounded by key staff - division heads and others - who desire to preserve the status quo.

Over the past four decades the SEC has refused to apply, and has weakened, the fiduciary standard. As a result of these and other actions and inactions at the SEC, Wall Street's pressure and influence has transformed what was once the most well-respected of our government agencies to a hollow shell.

The result of Wall Street's lobbying visits to members of Congress and the government agencies, which outnumber those of consumer advocates by 20 to 1 (or more), is a distortion of the truth. Wall Street knows that if their lies are said loud enough, and often enough, they become the “reality” perceived by those “inside the beltway.” I have personally observed policy makers, and their staffs, bombarded by visits from Wall Street’s firms and lobbyists, and thereafter adopt views of our present financial services system which are wholly distorted from the actual reality facing Americans on Main Street.

Financial and investment advisors – if you desire to do what is right for your clients, what can you do?

You can educate yourself, both formally and informally. You can become the expert advisor our fellow Americans deserve, able to critically examine financial and investment strategies, weigh risks and rewards, and recommend only those few strategies and techniques which withstand close scrutiny and, often, the tests of time.

You can choose to become truly independent, by transitioning to a firm that has embraced, wholly and without reservation, a bona fide fiduciary culture. You can choose to move on, so that you can truly sit on the same side as your client. You can choose to love being able to go to work and assist your fellow Americans, as you will deserve of their trust. You can choose to be stewards not only of your clients’ wealth, but also of their hopes and dreams. You can choose to love what you do, and to love yourself, as you embrace a love for your neighbors.

You can then join one of more of those very few professional organizations which embrace a bona fide fiduciary standard and who require practice models that eschew conflicts of interest – the National Association of Personal Financial Advisors (, the Garrett Planning Network (, and/or the Alliance for Comprehensive Planners (

You can choose to be part of the future, not the past, of investment advice. You can choose to abandon product sales in return for the joy derived from the delivery of objective advice. You can choose to be a trusted advisor. You can choose to be a bona fide fiduciary. You can choose to be part of the small but ever-growing community of professionals. You can choose to go to work each day with a smile on your face and knowledge that you are doing what is right for your clients.

Until many more make this choice, we cannot become a true profession. We have not earned that right. Collectively, at the present time, we do not deserve the trust of our fellow Americans. But, over time, with effort, this can change.

There are already a few financial and investment advisors – thousands (not tens of thousands) across this land – who possess the requisite expertise and true objectivity to truly be deserving of the title “professional.” They practice as bona fide fiduciaries. They are trusted advisors to their clients. They act as "purchaser's representatives," rather than "investment manufacturer product representatives." And, as word spreads of their deeds, their market share continues to gain.

You can take the actions necessary to join with other bona fide fiduciaries. Should you choose this path, the personal rewards (financial and otherwise) resulting from your endeavor will be far more than you ever thought possible.

Then, together, we can continue to press forward for adoption of the fiduciary principle. Together we can place our clients’ best interests above our own. Together we can justify our professional-level compensation, as a result of the application of our expertise in the representation of our clients.

Then, together we can correct the current sad state of the financial advisory industry. Rather than merely bear witness the evidence of harm caused by so many in financial services today, we can use our strengthened collective influence our policy makers to extend the fiduciary principle to all providers of financial and investment advice.

Only then will we, as a profession, earn the respect of our fellow countrymen, and enable them to better succeed in pursuit of their financial goals. Only then can we end the harm to which hundreds of millions of our fellow Americans are subjected.

Our fellow Americans deserve the emergence of a true profession of financial and investment advisors, bound together by the fiduciary standard of conduct.

Wednesday, July 9, 2014

Apply the Fiduciary Standard to Reduce the Number of Regulations, the Size of Government, and the Need for Wall Street Oversight

In the political climate of Washington, several members of the U.S. Congress have urged the U.S. Department of Labor and the U.S. Securities and Exchange Commission, both empowered by law to apply the fiduciary standard, to either slow down or stop their fiduciary rule-making efforts altogether. Often the reason expressed is concerns about the imposition of more government regulation, as well as reservations about the growth of the size of government. Yet, the contrary result is far more likely, as imposing bona fide fiduciary obligations will likely reduce both the number of government regulations and hold down the size of government. It will also foster the marketplace policing Wall Street, itself, thus substantially reducing the likelihood of the abuses which led to the financial crisis of 2008-9. Please permit me to explain.

One must initially understand the culture of true fiduciary advisors. Equipped with an agreement with their clients for reasonable, professional compensation, they utilize their expertise by “stepping into the shoes” of their clients. They act, at all times and without exception, as the representative of their client. They undertake this sacred obligation of trust zealously, with the due care of an expert, and acting with loyalty and utmost good faith at all times. Fiduciary advisors eschew opportunities for further compensation or other self-benefit, acting always to serve their client, and only their client. Fiduciary advisors possess an undivided loyalty to their clients at all times, and without exception.

Despite its overriding simplicity, many of those in Wall Street fail to understand the fiduciary standard of conduct. In my many discussions with Wall Street executives, they approach the issue from the standpoint of whether disclosures of conflicts of interest must occur (knowing all well that disclosures are ineffective as a means of consumer protection). So engrained are they in a sales culture, in which you “eat what you kill,” they cannot conceptualize, in their own minds, the true nature of the fiduciary standard.

In fact, I have observed many a stockbroker (i.e., “broker” or “registered representative of a broker-dealer firm”) depart from that environment to join fee-only fiduciary investment advisory firms, only to be asked to leave several months later. Their mindset was incapable of change, and hence – not able to adhere to the strict ethics of a fiduciary advisor – they were asked to leave.

Perhaps these brokers who then became “failed fiduciaries” should have received a better explanation of the fiduciary standard. In dictum in the 1998 English (U.K.) case of Bristol and West Building Society v. Matthew, Lord Millet undertook what has been described as a “masterful survey” of the fiduciary principle: “A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.  The distinguishing obligation of a fiduciary is the obligation of loyalty.  The principle is entitled to the single-minded loyalty of his fiduciary.  This core liability has several facets.  A fiduciary must act in good faith; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.  This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of the fiduciary obligations.  They are the defining characteristics of a fiduciary.”

While I admire Lord Millet’s prose, permit me to say it more directly: A fiduciary steps into the shoes of another person and applies all of her or his knowledge and skill to benefit that person as if she or he were that person. This is the essence of the fiduciary relationship.

So how does the application of fiduciary principles translate into a reduced size of government regulations, and a reduced size for government itself, and the policing of Wall Street?

First, the fiduciary standard is a principles-based standard. The fiduciary standard of conduct can be succinctly expressed as either “acting in the best interests of the client” or “acting with due care, loyalty and utmost good faith” (the “triad” of fiduciary duties often recited by U.S. courts. While further elicitations of the standard can be useful as guides to both fiduciary advisors and their clients, they are not absolutely necessary. In other words, unlike the regulatory scheme for non-fiduciary broker-dealers, where there exist a bevy of highly specific conduct rules governing what can and what cannot be done, there exists no compelling need for detailed rules to govern the conduct of fiduciaries.

Indeed, a detailed set of rules attempting to delineate fiduciary principles could prove to be counter-productive. Fraud is infinite, and the fiduciary standard of conduct must be free to combat fraud. Accordingly, the fiduciary standard must be permitted to evolve. While the fiduciary standard of conduct for investment advisers and personal financial planners is generally uniform, fiduciary duties are not static; rather, they must evolve over time to meet the ever-changing business practices of investment advisers and to ensure that fraudulent conduct is successfully circumscribed. Because fraud is by its very nature boundless, the one fiduciary standard of conduct applicable to investment advisers should not be subjected to attempts to define or restrict it legislatively, by means of any particular definition.

Second, less oversight is required of fiduciaries – once the culture is engrained. SEC and FINRA examiners of Wall Street’s broker-dealer firms often camp out for weeks and weeks when conducting regular visits to those firms. Why? As the SEC has long acknowledged, the sales culture and merchandizing aspects of the broker-dealer model, with its tendency to disguise obscure fees and costs where possible and with its many, many conflicts of interest, can easily lead to transgressions of the many conduct rules applicable to broker-dealers. As a result, thousands and thousands of registered representatives of broker-dealers are fined, or brought into arbitration proceedings by their clients, each and every year.

Yet, if a bona fide fiduciary culture is instilled, the need for such stringent government oversight is substantially lessened. For example, attorneys-at-law are fiduciaries, and their exist hundreds of thousands of them. Yet, I am not aware of any state that conducts routine periodic examinations of lawyers. Instead, the existence of the fiduciary culture is embedded through training and tradition within the legal community, and peer pressure exists to adhere to fiduciary principles, resulting in few transgressions. What problems that do emerge are resolved by a relatively small handful of investigative staff employed by the states, as well as through private civil litigation.

I’m not stating that fiduciary investment advisers and brokers (if fiduciary standards are applied by rule to them) do not need any routine examinations. Unlike most attorneys (and CPAs), some investment advisers (as well as nearly all broker-dealers) accept “custody” of their client assets. It is an essential government function to verify that customers’ assets actually exist; frequent inspections of custody arrangements are essential to ensure that small frauds don’t become huge ones. Yet, such inspections need not take weeks, for routine examinations seldom uncover Ponzi schemes and other thefts of client assets. Rather, most frauds involving custody are detected after a complaint from a client or from a concerned employee. A smart examination would spot check high-risk firms frequently, and for all firms would reach out to employees to encourage whistle-blowing for any actual fraud. And such limited, one-day examinations would occur more frequently, in recognition of the fact that most Ponzi schemes and thefts occur due to financial pressure felt by the securities industry participant, starting off small but ballooning over the course of a few years to involve many more victims.

With the imposition of a bona fide fiduciary standard, and substantial education and training around that standard, over the course of time a true fiduciary culture can develop among all providers of personalized investment advice – whether investment advisers or brokers. And with such a culture will come a reduced number of transgressions, and reduced need for examinations and other forms of oversight. In essence, the SEC, FINRA, and state securities administrators, whose collective staffs have grown to number thousands and thousands (not counting the many compliance officers and staff within firms themselves, nor compliance consulting firms), can see a reduced need for examinations under a bona fide fiduciary standard. Our government’s resources, always limited, can be focused on what truly matters in protecting consumers – asset verification and the detection of actual frauds before they grow into Madoff-like billion-dollar frauds.

Third, and perhaps most importantly, the fiduciary standard reduces the risks of rampant abuses by Wall Street. Think about it. What if Wall Street did not consist of six hundred thousand (or more) product peddlers, but instead consisted of hundreds and hundreds of thousands of fiduciary “purchaser’s representatives”? These fiduciary advisors, bound to use their expertise to guard against undue risks to their clients, would carefully scrutinize the many complex products of today. It is likely that the widespread use of mortgage-backed securities consisting of sub-prime mortgages (as Senator Levin expressed in 2010, “sh***y products) would have occurred had such deals been scrutinized by expert fiduciary advisors, instead of being pushed upon unsuspecting investors.

In fact, the securities markets would likely become far more “efficient” as to the pricing of securities. IPOs of common stock, which on average underperform the overall market in the first two years after issue (due to the hype provided by investment banking firms which underwrite the firms), would likely be much more fairly priced. Asset price bubbles would receive far more scrutiny, as they began to occur, as experts better evaluated the available evidence in adherence to their fiduciary duty of due care to protect their clients against undue risks.

Another type of efficiency would occur, over time. Hundreds of thousands of purchaser’s representatives – fiduciary, expert advisors – would place pressure on the Wall Street oligarchy that controls investment underwriting today. Fees and costs in the primary market for securities issuance would decline. Continued disintermediation in the secondary markets would also occur. Consider the excessive costs imposed upon investors by “payment for order flow” (exacerbated by dark pools and high-frequency trading firms) and “revenue-sharing” arrangements today; pressure would be put on brokers and dealers to eliminate, or at least substantially reduce such payments, should expert advisors accompany more of the consumers of securities products today. Of course, that may be exactly what Wall Street fears most, from the application of the fiduciary standard, and hence why Wall Street opposes a bona fide fiduciary standard so ferociously.

In summary, those who desire to see a reduced role for government, a lesser number of regulations, and reduced need for government to oversee Wall Street, should embrace the application of a bona fide fiduciary standard to all providers of personalized investment advice. Applying the fiduciary standard is the ultimate in securing a marketplace solution to Wall Street's continued abuses. Policy makers should recognize this - regardless of their political affiliation.

Tuesday, July 8, 2014

431 Days and Counting: Mary Jo White and Her Legacy as the SEC Chair

In July 1934 President Franklin D. Roosevelt appointed Joseph Patrick Kennedy (the father of future President John F. Kennedy) as Chair of the newly created Securities and Exchange Commission (SEC). Despite widespread qualms about the appointment of a business person who had made a personal fortune from financial manipulation, Joseph Kennedy’s tenure proved to be just the start necessary for the new agency. Kennedy knew the business community and understood the business practices he was charged with policing.

Despite serving only a mere 431 days as the SEC’s Chair, Joseph Kennedy’s legacy was substantial. Despite this brief tenure, he had helped create an institution that was flexible, resourceful, and arguably the most respected of all of the government agencies.

The present Chair of the SEC, Mary Jo White, has been on the job for slightly more than 431 days currently. Certainly the task facing her has been formidable, as Mary Jo White focused first on prosecutions of firms and individuals arising out of the financial crisis of 2008-9, as well as mandatory rule-making burdens imposed by the Dodd-Frank Act and the Jobs Act. Much work remains in these areas, and early reviews of Mary Jo White’s effectiveness have been generally positive.

Yet, I wonder ... what Mary Jo White’s legacy will be? Unless re-appointed by a new President, Mary Jo White likely has only two-and-a-half years or so left as Chair of the SEC. Any new rules today must be formulated, proposed, comments received and analyzed, and then finalized – a process than can easily take two years or longer.

Of all of the abuses of Wall Street, perhaps the most insidious is that of Wall Street’s false embrace, through its lobbying organizations, of the “fiduciary standard” for brokers who provide personalized investment advice. Yet, looking through their public statements, one sees that what Wall Street really wants is to be able to hold out as “trusted advisors” while, in reality, disclaiming (and having clients waive) fiduciary protections. Wall Street wants to claim to be "fiduciaries" but then do business as usual and continue to extract exorbitant rents from individual investors.

As I have written previously in this blog, the fiduciary standard operates as a restraint on conduct – i.e., as a restraint on greed. While certain practices might be expressly permitted by Dodd Frank Act under a fiduciary standard applied to brokers (such as commission-based compensation), it must be fully realized that other business practices – such as the receipt of variable compensation through often non-disclosed (or weakly disclosed) revenue-sharing arrangements, payment for order flow, soft dollars, and 12b-1 fees – create for the fiduciary a nearly insurmountable burden in adhering to a bona fide fiduciary standard. This is because so much academic research has demonstrated that: (1) higher fees and costs are strongly correlated to lower returns for investors; and (2) disclosures are ineffective as a means of consumer protection, and indeed create “perverse effects.”

In essence, mere disclosure of a conflict of interest does not adhere to one's fiduciary obligation of trust; much more is required in order to keep the client's best interests paramount.

In other words, no person can serve two masters. As a fiduciary, you either serve the best interests of the client, or you do not. You agree with the client in advance on reasonable compensation, and then you recommend the best products available. As a fiduciary, you don't push a product upon a client who trusts you, just so you or your brokerage firm can make more money.

Indeed, the SEC has long noted the problems arising from the various compensation schemes of brokers and the many conflicts of interest arising therefrom, once opining:  “[T]he merchandising emphasis of the securities business in general, and its system of compensation in particular, frequently impose a severe strain on the legal and ethical restraints.” 1963 SEC “Special Study of the Securities Markets.” See also Arleen W. Hughes, Exch. Act Rel. No. 4048, 27 S.E.C. 629 (Feb. 18, 1948)

The SEC has not always taken such a light hand with brokers, when they moved into providing individualized advice to individual consumers. Early on the SEC acknowledged brokers were often fiduciaries to their clients, and cautioned brokers to not “disguise” themselves as trusted advisors (as they so often do now). The SEC stated:

If the transaction is in reality an arm's-length transaction between the securities house and its customer, then the securities house is not subject to ‘fiduciary duty.’ However, the necessity for a transaction to be really at arm's-length in order to escape fiduciary obligations, has been well stated by the United States. Court of Appeals for the District of Columbia in a recently decided case: ‘[T]he old line should be held fast which marks off the obligation of confidence and conscience from the temptation induced by self-interest. He who would deal at arm's length must stand at arm's length. And he must do so openly as an adversary, not disguised as confidant and protector. He cannot commingle his trusteeship with merchandizing on his own account….’

Seventh Annual Report of the Securities and Exchange Commission, Fiscal Year Ended June 30, 1941, at p. 158, citing Earll v. Picken (1940) 113 F. 2d 150.

In the same report, the SEC also alluded to a specific case involving brokerage activities, which arose to the level of “investment counsel” and hence a fiduciary relationship:

In the Stelmack case the evidence showed that the firm obtained lists of holdings from certain customers and then sent to these customers analyses of their securities with recommendations listing securities to be retained, to be disposed of, and to be acquired … The [U.S. Securities and Exchange] Commission held that the conduct of the customers in soliciting the advice of the firm, their obvious expectation that it would act in their best interests, their reliance on its recommendations, and the conduct of the firm in making its advice and services available to them and in soliciting their confidence, pointed strongly to an agency relationship and that the very function of furnishing investment counsel constitutes a fiduciary function.”

Seventh Annual Report of the Securities and Exchange Commission, Fiscal Year Ended June 30, 1941, at p. 158.

Two decades later the SEC repeated its warning to brokers – that they would be considered fiduciaries where customers relied upon them for personalized investment advice:

[The SEC] has held that where a relationship of trust and confidence has been developed between a broker-dealer and his customer so that the customer relies on his advice, a fiduciary relationship exists, imposing a particular duty to act in the customer’s best interests and to disclose any interest the broker-dealer may have in transactions he effects for his customer … [BD advertising] may create an atmosphere of trust and confidence, encouraging full reliance on broker-dealers and their registered representatives as professional advisers in situations where such reliance is not merited, and obscuring the merchandising aspects of the retail securities business … Where the relationship between the customer and broker is such that the former relies in whole or in part on the advice and recommendations of the latter, the salesman is, in effect, an investment adviser, and some of the aspects of a fiduciary relationship arise between the parties.

1963 SEC Study, citing various SEC Releases.

The SEC has transgressed in recent decades. As I have previously written about in this blog, as the result of a series of decisions stretching back to 1975, the SEC now permits brokers to hold out to the public as being in a relationship of trust and confidence through the use of titles such as “financial consultant” and “wealth manager.” The SEC has permitted dual registrants to disclaim their core fiduciary obligations through inappropriate language found in their Form ADV and in client services agreements. It has not applied the duty of care to the selection of investment managers, relying instead upon the weak suitability standard (which should only apply to transaction execution by brokers, without more). It has permitted anti-competitive 12b-1 fees (“advisory fees in drag”) – often 1% in Class C mutual funds with no opportunity for client negotiation – to be utilized (despite judicial opinions which note the confines of the term “special compensation” in applying the broker-dealer exclusion to the requirement for registration from the Advisers Act). The SEC has even defined the term "solely incidental" out of existence. The SEC has also permitted broker-dealer firms both big and small (and, more recently, even FINRA) to use the term “best interests” - without cautioning that such term denotes a fiduciary relationship and, outside of such a relationship, misleads investors. And the SEC has inappropriately permitted “switching of hats” and “dual hat” wearing by dual registrants, contrary to the common law which informs the federal fiduciary standard that fiduciary is applied to relationships, and not accounts.

In essence, the SEC has permitted brokers – when providing personalized investment advice – to ignore the fiduciary standard (whether or not deemed applicable by the SEC). It has permitted those brokers in relationships of trust and confidence with their clients to subordinate the interests of their customers to the brokerage firms' own interests. The SEC has permitted brokers to enter into relationships of trust with their customers, and then – over and over again – betray that trust.

All of this has led to great detriment of investors, in this ever-more-complicated world of financial services. In my reviews over the past fifteen years of hundreds and hundreds of the investment portfolios of customers of broker-dealer firms, I nearly always find total fees and costs of 2% or much higher – and I would estimate that the average is 2.5% to 3%. (This is more than twice the average total fees and costs seen in portfolios managed by true fiduciary investment advisers, who avoid most conflicts of interest.)

All of this is just confirmation of the often-cited statistics that the financial services industry today ... instead of serving as grease for American’s economy, is but a sludge as it extracts 30% to 40% of the profits generated by operating businesses. Of course, such extraction of rents ruins the financial futures of millions of Americans today, endangering their retirement and their ability to provide for their own future needs. If instead, we were to protect our fellow Americans from excessive investment fees and costs, Americans would be able to provide for themselves far better in their retirement years, thereby lessening the burdens on federal, state and local governments, as well as the burdens on charitable  organizations.

How do governments react, in the fact of such SEC inaction? One need look no further than the recent federal government’s proposal for “myRA” accounts, or the very recent development by 17 state governments that are now considering their own form of investment accounts for workers. Where Wall Street cannot be trusted (and falsely opines that small investors cannot be served under a fiduciary standard, despite the fact that numerous registered investment advisers are doing just that today), the government seeks its own solution – one that disintermediates nearly all financial intermediaries and increases the size of government itself.

Despite the authority granted to the SEC four years ago by the Dodd-Frank Act, the SEC has stood idly by and has not yet proposed fiduciary rules. While Mary Jo White has indicated that she desires a “direction” for fiduciary rule-making by the end of 2014, rumors from Washington, D.C. have indicated that a “direction” for fiduciary rule-making won’t occur until at least mid-2015. I would suggest that this is far too late, not only for individual investors everywhere, but also for Chair Mary Jo White to secure for investors the protections of a bona fide fiduciary standard, for all those who receive personalized investment advice.

Over 431 days have already passed in Mary Jo White’s tenure as SEC Chair. Only several months remain for her to begin, in earnest, the process of implementing a true, bona fide fiduciary standard that American consumers deserve and that the American economy so desperately needs.

Let us hope that Chair Mary Jo White will act to effect, correctly and firmly, a bona fide fiduciary standard under the authority granted to the SEC by Section 913 of the Dodd-Frank Act. Let us hope that, when she proceeds, she ignores Wall Street’s call for an ineffective “new federal fiduciary standard” based upon disclosures alone, and instead embraces the true federal fiduciary standard which keeps paramount, at all times, the best interests of our fellow Americans.

Let us hope that Chair Mary Jo White will secure for herself a historic legacy as she seeks to right the SEC ship, and in so doing restores the SEC’s prestige as a government agency. Let us hope that Chair Mary Jo White does not become just another in a long line of SEC Chairs that favors the interests of Wall Street over the interests of Main Street.

The time for action is now. Let us hope that, decades from now, Chair Mary Jo White becomes looked upon as favorably as the first SEC Chair, Joseph Kennedy. Let us hope.

Ron A. Rhoades, JD, CFP(r), serves as Chair of The Committee for the Fiduciary Standard. He is Asst. Prof. and Chair of the Financial Planning Program at Alfred State College, Alfred, NY. He may be reached at: Readers are invited to follow his tweets on Twitter (@140ltd) and to link with him via LinkedIn, to stay abreast of future postings.

Surprising Drivers of “Success” for College Students Today

In an article titled “What Drives Success” appearing in the Jan. 25, 2014 edition of the The New York Times, Professors Amy Chua and Jed Rubenfeld of Yale Law School revealed the three key traits which drive success in life. They opined: “The strikingly successful groups in America today share three traits that, together, propel success. The first is a superiority complex — a deep-seated belief in their exceptionality. The second appears to be the opposite — insecurity, a feeling that you or what you’ve done is not good enough. The third is impulse control.”

Then authors then went on to state: “Any individual, from any background, can have what we call this Triple Package of traits … It’s odd to think of people feeling simultaneously superior and insecure. Yet it’s precisely this unstable combination that generates drive: a chip on the shoulder, a goading need to prove oneself. Add impulse control — the ability to resist temptation — and the result is people who systematically sacrifice present gratification in pursuit of future attainment.”

As an educator, this confirms to me that I want each student to feel that they are exceptional. Yet, I must also challenge each student by emphasizing that merely having the ability to be special, and the opportunity to attend college, is not enough. In essence, you may be exceptional - but you need to prove it, over and over again. And do this by demonstrating self-discipline (self-control) and through grit.

The foregoing insights from the Yale Law School professors are important, and can lead to new strategies for motivating students - to be used by both educators and parents alike.

Applied to students as individuals, I would suggest a defined process of self-reflection, goal-setting, and focusing on the acquisition of key skills is also required for all college students.

First, Possess a Vision of Your Present and Future Self

Who are you? You should know that you are not only unique, but that you possess the ability to grow as a person, and intellectually. Academic research has revealed that your intelligence (as measured by I.Q. scores or otherwise) is not fixed. Indeed, you are capable of much more than you ever thought possible. It is important for you to realize that you can transform yourself, and your skills and personal traits, tremendously during your college years. In other words, you should possess a “growth mindset.”

If you are entering college soon, or if you are currently in college, ask yourself, “Where will I likely be in ten years, if I don’t have a college degree?” Now ask yourself, “Where will I likely be ten years from now with a college degree in hand?” It is important for you to have a vision of your future self - where you want to be, both professionally and personally.

As to the financial aspects of success, we know that more education generally translates to higher earnings. In a report issued in June 2014 by the Federal Reserve Bank of New York, titled, “Do the Benefits of College Still Outweigh the Costs?” – the authors concluded: “From 2001 to 2013, the wage advantage over high school graduates reached 75% for bachelor's degree holders and more than 20% for those with an associate's degree.”

But I would like to think that college is much more than just securing skills for higher-paying jobs, and that it is also about becoming a better, well-rounded person. Indeed, it is said that 75% of the learning which occurs in college occurs outside of the classroom. So also ask yourself ... in ten years, what groups will I be involved in? How will I be at socializing with friends and family, and at networking to secure new business contacts? Will I be able to give influence others? Will I be able to stand up and speak effectively to a group of people? Have a vision of the type of person you want to be.

Second, Match Your Interests to a Career Path

We know where the most jobs exist. According to a survey by the National Association of Colleges and Employers (NACE) released in April 2014, 68.8% of companies said they want to hire students set to graduate with business degrees, 66% are looking for engineers, 59% want accounting graduates, and 50% desire grads with computer science degrees.

While demand for certain degree holders is growing ever stronger, graduates with other degrees are in far less demand. As a college student, you need to know what the college degree is likely to get you – in terms of employment, likely starting salary, and likely mid-career and end-of-career salaries. Then you need to match your own personal interests and aptitudes to a career path. Your college’s career development center can assist you in this process, as can your academic advisors and other mentors.

Third, Understand the Skills Employers Are Seeking

It’s not just the sheepskin with a particular degree that employers are looking for. You also need to further develop, during your college years, the key skills that employers of today desire. Here is a list of those skills, ranked in order of importance (per the NACE study):
  • Ability to make decisions and solve problems (i.e., critical thinking skills … this is why those college algebra and/or other college math courses, and other courses which emphasize deductive and/or inductive reasoning skills, are so important)
  •  Ability to verbally communicate with persons inside and outside the organization (socialization, networking, presenting, persuading)
  •  Ability to obtain and process information (because new insights occur always, and so much information is now available – research skills, and the skills to process information uncovered, are important)
  •  Ability to plan, organize and prioritize work (i.e., time management on steroids)
  •  Ability to analyze quantitative data (again, critical thinking skills, enhanced by the ability to use spreadsheets and databases)
  •  Technical knowledge related to the job
  •  Proficiency with computer software programs (not just Facebook!)
  • Ability to create and/or edit written reports (why writing skills are so important, and why each essay you write – whether in Freshman Composition or otherwise – is important).
  • Ability to sell or influence others (an aspect of verbal and written communication skills)

See any trends above? While technical knowledge in your chosen field is important, equally important are other skills. Perhaps we can summarize the foregoing list further, by asking:

                Do you possess excellent writing skills?

                Do you know how to verbally communicate well in all types of situations?

                Can you organize yourself and keep yourself working on higher-priority projects first?

                Can you uncover and then undertake analysis of data in your field?

While you may be strong in some areas, and weak in others, know this ... every college student can improve in each and every one of these areas. You have the capacity to grow, develop, and become a highly attractive graduate to employers - and a highly successful person in all aspects of your adult life. But ... you must accept personal responsibility for your own success - you must PROVE yourself worthy.

Fourth, Focus on the Three S’s in SUCCESS

Your most valuable commodity is TIME. It's the one thing you can never replace. It is, by far, the largest "cost" of attending college. So use your time in college most effectively, to develop your core skill sets - and to improve as a person.

Here are three key areas college students can focus upon – what I call “The Three S’s in Success,” and some links to some previous posts which explore these concepts:

Socialization Skills - see and also see

Professor Ron A. Rhoades, JD, CFP(r) teaches Business Law, Retirement Planning, Investment Planning, Employee Benefits Planning, Money & Banking, Insurance & Risk Management, and the Personal Financial Planning Capstone courses at Alfred State College, Alfred, NY. He is an EPLP Mentor, C.R.E.A.T.E. program mentor, serves as advisor to Alfred State's Business Professionals of America club, and serves as academic advisor to dozens of students.

Professor Rhoades is the author of "CHOOSE TO SUCCEED IN COLLEGE AND IN LIFE: Continuously Improve, Persevere, and Enjoy the Journey," a 10-week program for success in college (available for $2.99 in Kindle store at, or in paperback for $6.99). Professor Rhoades may be reached by e-mail at: