Sunday, September 28, 2014

Evidence of Harm, Part 2: "Suitability"?

The 90-year old widow, Mary, a client of my estate planning law firm, was upset. Not at me. Nor at her family. Rather, she was upset at her broker.

The week before she went to her broker. The broker suggested that she annuitize a significant portion of her investment portfolio. The client was already substantially invested in a variable annuity, sold by the same broker to that client eight years before. The existing variable annuity, if it had been annualized over life with a ten-year certain as provided under the terms of the contract, would have yielded a nice monthly check for my client.

But the broker suggested something different. Rather than annuitize the existing annuity, which would have resulted in little or no compensation to the broker, the broker suggested a tax-free exchange into a new, immediate annuity. Again a life annuity with a 10-year certain. He described it as  "better product" to the client. Trouble was, the monthly check was significantly less. In fact, the rate of return over the 10-year guarantee period was only 1%. Of course, the client could live longer, past age 100, but the client's family history and current health indicated that such a possibility was very unlikely.

The client had come to me for a review of the transaction. She thought something might be wrong, but she was uncertain.

As I delved into the details, I could find no good reason for the tax-free exchange from the existing annuity into a new annuity. Both insurance companies were highly rated. The annuitization of the existing variable annuity had no downside, and would have resulted in a better return to the client - and a larger monthly check.

The only reason for the new annuity was the fact that the broker would receive compensation - which was substantial. Hence, the lower rate of return to the client.

I wrote to the brokerage firm on behalf of the client, relaying the results of my investigation, and requesting that they undo the transaction. The reply was a one-page letter from their legal department stating that the transaction was "suitable" for the client and that the broker acted "in accord with the law."

The securities litigation firm I had consulted on behalf of the client indicated that pursuit of the claim through arbitration was unlikely to lead to a ruling in favor of the client. If the client pursued a claim in arbitration, the client would not only have to pay fees for her own attorney but could be liable for fees of the brokerage firm's attorney.

As is the case with many elderly clients, my client did not want to pursue the matter further.  No complaint would be filed with the state insurance commission. No submission of the matter to arbitration. I didn't blame her.

What my client never could grasp was that her broker was a salesperson, nothing more. While she told me she "trusted" her broker, she was unaware that she could not rely upon his advice. No fiduciary duty existed to provide good advice. As a result, the elderly widow was subject to the broker's whims. Even after the broker had done this to her, she described him as a "nice young man" who "should be forgiven for his mistake."

A few years after this incident the client died. She could have lived those last few years with a bit more financial security, and with the ability to visit her family more often. But this was denied to her, due to the inappropriate and self-serving "advice" provided to her by her broker.

The reality is that "suitability" is a doctrine that was designed to alleviate liability for executing transactions in individual stocks. Under the suitability doctrine, the duty of due care of the broker is abrogated to a significant degree. While perhaps appropriate for transaction-only services, the doctrine has been extended in recent decades to the advice given by brokers with regard to the selection of pooled investment vehicles, such as variable annuity sub-accounts and mutual funds. With no duty of due care, brokers are free to recommend bad (and expensive) investment products. With conflicts of interest persisting in the brokerage industry, brokers possess substantial incentives to behave poorly. The temptation of additional or greater commissions (or other forms of compensation) is simply too great for most to resist.

Brokers hide behind this suitability veil. It permits them to give poor advice to their customers, in ways that permit conflicts of interest to be ignored and, as a result, harm to result to their customers, over and over again.

As study after study has shown, customers believe brokers act in the customer's best interests. They are led to this conclusion through a confusing array of titles ("financial consultant," "wealth manager," etc.), designations ("Chartered Financial Consultant," etc.), and broker-dealer advertising that creates reasonable expectations that the advice provided will be objective. Sadly, in most instances, customers do not receive the trusted advice they desire, need, and reasonably expect to receive.

It's time for the fiduciary standard. For all providers of financial and investment advice. Our fellow citizens - from 90-year old widow Mary attempting to manage their nest eggs, to newly married couples beginning to save for their future financial needs - deserve no less.

Ron A. Rhoades, JD, CFP(r) is the Program Director for the Financial Planning Program at Alfred State College, Alfred, NY. He also serves as 2014 Chair of the Steering Group of the Committee for the Fiduciary Standard, a group of volunteer leaders of the financial planning profession dedicated to the proposition that all Americans deserve to be provided investment and financial advice under a bona fide fiduciary standard of conduct. Ron may be reached by e-mail at:

Wednesday, September 24, 2014

A Simple Solution to Fiduciary Rulemaking at the SEC

Fiduciary opponents bemoan possible rulemaking at the SEC in which brokers who provide "personalized investment advice" would be subject to broad fiduciary duties (including due care, loyalty, and utmost good faith) currently applicable to investment advisers (pursuant to the Investment Advisers Act of 1940).

Fiduciary advocates worry that the SEC will choose not to apply fiduciary standards - or even worse, adopt a "new federal fiduciary standard" based upon disclosure of conflicts of interest. Fiduciary advocates correctly point out that disclosure of a conflict of interest is not enough - informed consent must occur, and no client would likely ever provide informed consent to be harmed. In other words, even with informed consent, conflicts of interest must be managed properly in order that the best interests of the client remain paramount - a matter of "substantive fairness."

What will the SEC do?

There is a simple, elegant solution. It is found in state common law, which serves to inform federal common law. The SEC can merely adopt the following rule: "Any registered representative of a broker-dealer, and its firm, become a fiduciary to its customer when a relationship of trust and confidence is formed."

After promulgating this simple statement, the SEC could let the courts determine when a relationship of trust and confidence arises. There is already a body of common law around this issue.

Of course, further guidance will likely be needed from the SEC, over time, to ensure that fiduciary obligations are not attempted to be circumscribed by the actions of broker-dealers. Such as:
  • The contract with the client does not determine whether a relationship of trust and confidence exist. Substance trumps form.
  • No client may waive the application of fiduciary status when a relationship of trust and confidence exist.
  • Core fiduciary obligations cannot be disclaimed, nor waived by the client. Estoppel and waiver possess limited application to most fiduciary relationships. (Even the "contractualist view" of fiduciary standards, as expressed by Easterbrook, acknowledges that the core fiduciary duty of loyalty cannot be waived by client consent. The contractualist view of fiduciary obligations is better suited to situations where the parties do not possess vast information asymmetry, such as might be found in the formation of a partnership.)
  • Certain narrow limits on the scope of an engagement are permitted (such as the duration of the engagement).
  • Once a relationship of trust and confidence is formed, it extends to all aspects of the relationship. (No wearing of two hats at the same time can occur.)
  • Once a relationship of trust and confidence is formed, the "fiduciary hat" cannot be removed if any advice (including product recommendations) is to be provided to the client.
  • While a registered representative may also possess a fiduciary duty to her or his broker-dealer firm, this obligation is secondary to the fiduciary duty which the registered representative and the firm owe to the client, when a relationship of trust and confidence exists.
Also, a great deal of education will be required of broker-dealer firms and their registered representatives. It can take quite an effort to instill a fiduciary culture within a firm, especially when there is a sales culture already embedded in such firm. Extensive training, from the top to the bottom, is necessary.

Ron A. Rhoades, J.D., CFP, is an Assistant Professor of Business at Alfred State College, Alfred, NY. He also serves as Chair of the Steering Group of The Committee for the Fiduciary Standard, a volunteer group of industry leaders who commit parts of their time and treasure to advocate for the application of the fiduciary standard to all providers of investment and financial advice. Ron can be reached by e-mail at  Web site: 

Friday, September 19, 2014

The Fall 2014 Comfort Zone Challenge for College Students

College students ... 

Do you want a well-paying job? You must become well-rounded!

Do you want a successful life, in every sense of the word? You must expand your boundaries to find all that life has to offer.

College is a great place to transform yourself. Why? Because what have you got to lose? If someone judges you, just move on … you’ll likely not see them again (and they don’t need to be part of your personal universe any more). There are plenty of persons who will like you for who you are, and who will appreciate the fact that you are committed to continuous self-improvement.

All it takes is an active effort on your part to extend, just a bit each day, your Comfort Zone.

Will you take on the challenge to “Expand Your Comfort Zone” – by doing one thing each day that scares you? 

Many of your fellow students have chosen to expand their comfort zones. After tackling the exercises (see attached document), they wrote about their experiences. Here are insights from your fellow students:

“I was challenged by my Business Law professor to open my eyes and explore new things I have never thought to accomplish before. He handed us a list of 26 expand your comfort zone ideas to help us open new horizons in our personality. When he first handed this list to me I felt extreme anxiety because I do not like going outside my comfort zone.”

“Life Is Either A Daring Adventure, Or It Is Nothing.”

“This assignment was nothing like anything I have ever done before. When I first got this assignment I was very nervous about all of this and felt like I just did not want to do it. I am very glad that I did this assignment as it has allowed me to open my eyes and grow more. I feel better about being more open to new things because they were not nearly as scary as I imagined they would be and left me feeling great.”

“By expanding your comfort zone, you are giving yourself access to all that life has to offer. You only have one life to live, live it to the fullest everyday with no regrets.”


“Who knew something so little could act so big; I definitely did not.”

“An extra hour of sleep can change your entire day.”

“I have been able to pay more attention in class and I am no longer a zombie walking around campus. Overall I am surprised about the outcome of this, I didn’t think that there would be any different results at all.”


“I told a stranger to come sit with my friends and me while we were eating lunch. He seemed pretty content being alone, and I was very skeptical of bothering him at first. I got up anyway and told him to come grab a seat with a few friends and me. He responded ‘Sure, I’d love to,’ and he pulled over a chair. We all ended up chatting for over an hour and decided to hang out that weekend … If I never approached him, I wouldn’t have met someone with whom I have so much in common with and who can potentially become one of my greatest friends.”

“The last act of kindness that I did was inviting a very shy, introverted girl in my class to come hang out with my roommate and me over the weekend. She seemed surprised by my offer … we could just hang out and watch movies, instead of going out. I didn’t think she would come, but sure enough I received a text asking if she could stop by for a bit. I was glad she came by because she ended up being a ton of fun, and she undoubtedly broke out of her shell by the end of the evening.”


“What I especially liked about my experience in the writing center was that he did not hand the answers over to me. My proctor explained my problems and had me find them myself which further improved my learning process. I definitely see myself going there again and again!”


“I have never had a tutor before in my entire life so going to ask for a tutor at the Student Success Center was actually very humbling.”


“I went into CDH and randomly sat with a group of freshman. They were happy to have me hang out with them. We spoke about their experience so far and what they have planned for the future. Although our maturity levels were different, they made me feel welcomed. They showed me that college students are always enthusiastic to meet new people.”


“I wrote a letter addressed to my [relative] about how this is the time of my life where I let go of all the resentment, anger, and bitterness that has been built up toward her over the years. Writing this letter really helped me channel some deep, inner emotions that I haven’t connected with in years. As I was sitting in front of the computer, I felt a wave of every emotion come crashing down on me, anxiousness being one of them. I did not know what to expect from this exercise. After writing the letter, I had felt as if this weight was lifted off my chest.”


“The first activity that I attended was the ‘Night on the Green.’ I sat outside for the live concert and then decided to stay for the movie. I’m usually the last person to get involved on a college campus, but this activity turned out to be a lot more exciting than I expected. I met a ton of people from my major and even some from my hometown …  I’ve learned that sitting in your room can and will negatively affect your social life.”


“Giving out these compliments to people I had never met brightened up their day, and made me feel good about myself.”


“I chose to join the (a campus organization). I was worried that I would not have enough time to study and do homework. I quickly realized that, if I spend less time each day on the internet and watching television, I can get my studying done and go to (the club meetings and activities).”


“My third activity was showing three of my friends the “Power pose” TED Talk online. They all thought it was actually a good concept and thought about giving it a try. A few days later two of them came back to me and told me that they each tried it before a test and they felt better about those tests.”


“The fourth exercise I chose was something I really never thought I would do, “Let go of your self-judgment for a day. And do something others would never think you would do. Feel good about yourself. If others think ill of you – they do not matter; they are no longer part of your personal universe.”


“I posted this picture to Facebook, tagged both of my parents in it, and told them how much I really appreciate them. I also texted them both and thanked them for some of the little things that they do for me that mean so much. Of course, I couldn’t name them all because the list is endless. The instant trigger of happiness I added to their lives was the most self-rewarding feeling in the world.”


“I, too, suffer from being incredibly self-conscious; I’m shy, timid, anxious, and extremely worried about what others are thinking about me. As a result, I generally keep my mouth shut during class, nod, and think the whole time, ‘Please, don’t call on me.’ When a teacher asks me to talk or present something in front of the class, I dread it. A very good point was brought to my attention by Dr. Rhoades – this was to ‘rush toward my fear.’ If you’re afraid of something, why drag it out? Get it over with and be able to feel the achievement after the task is completed. That’s why I decided to ‘speak up in class – when you normally would not speak up.’ So, when it was asked of the class to present a success tip and explain how it impacted our life, I volunteered to present. Yes, I was nervous, embarrassed, and afraid the kids would think I was foolish, but I marched on. Dr. Rhoades also said, ‘No one knows you’re embarrassed besides yourself,’ so I marched on. After the task was completed, I felt good about myself. It helped me realize that no one determines my happiness besides myself, so why does it matter what anyone else thinks about me?”


“I chose to unplug my television for a whole week. I found this to be a bit challenging considering my absolute favorite shows … From doing this activity though I realized I finished a lot more homework earlier during the week and didn’t have to worry about doing it later at night after practice or a game like I usually would. I found that unplugging my TV actually benefitted me in that I focused more and got assignments done early and didn’t have as much of a distraction. Furthermore, I learned that if I want to get things done and out of the way I’ll do them first so then I can possibly have some down time to relax and watch TV once in a while and I can be worry free!”

“It felt good to not be such a couch potato and accomplish some stuff that I normally would have been scrambling to get done.”


“The last activity that I performed would be analyzing and changing my group of friends. Even though I came to Alfred State not knowing a single soul, it seems that I still tend to become friends with the same kind of people as I did back home. Not that there is anything wrong with the people I have become friends with as of now, but I would like my college experience to not be remembered by all the people I met who cannot miss a party but by the people who helped me reach my goal and provided a positive influence on me.”


“After putting these quotes up people asked me why I was on a positive mood streak or posting success tips. Instead of tell people I had to do an activity for class, I said because I am changing my life around to be a more positive successful person in my life. To strive to be the best I can be. Doing this has made me happier day-by-day, and made me feel better about myself. It is something I will continue to do at least once a week.”

“I chose to post a success tip every day for five days on my Twitter. I enjoyed doing this activity because I knew that someone was reading it and it may or may not have impacted their life in some way. I always got a favorite or a re-tweet on the success tips I posted. This activity makes me want to continue to put something inspirational up more often. There is too much negativity on social media, and I’m going to change that by posting my success tips!”


“I joined a study group. I knew that this would be a test to see if I were now more socially comfortable. In one of my classes we were to have our first exam, and I wanted to make sure I passed. Usually I enjoy working alone, but I wanted to see what difference it would make for me to work with others. I was amazed at the amount of ideas and tips I was able to put forward to help everyone pass. About two weeks ago I would have never wanted to work with others.”


“This activity scared me, for I felt embarrassed to say anything to these strangers. I didn’t want people to think I am the weird freshman on campus. After I had done this all day, I began to realize that it became easier to say ‘hello’ to the people I passed by. I also began to take notice that the people didn’t think I was some weirdo, and laugh at me. They all just looked happy that someone said something to them and smiled back at me. Seeing the people smile made me happy and put a smile on my face as well.”

“As corny as this was, it managed to keep me in a decent mood throughout the day into the evening. I’ve realized that if you walk around the halls with a frown on your face it will put you in an uncertain, negative mood. One smile that you send out to a peer can change their day for the better.”


“Thank you for reminding me that there is always more room to grow.”

“I have realized that to be successful in life that one must go through many uncomfortable moments.”

“After each exercise, it became clearer that the more insecure I felt about completing the task before hand, the more I was able to learn from it.”

“It was evident that after reviewing all of the exercises that the ones that helped me the most were the ones that I feared the most.”

“Doing these six tasks was the most stressful and anxiety-driven experience of my life. They have also opened up a new door for me to explore myself … I hope to continue the process of expanding my comfort zone so that employers are willing to give me a chance to show what I can really do.”

“Thank you for teaching me to take risks.”

Ready to accept the challenge? Here is your assignment.

Eleanor Roosevelt once wrote, “Do one thing each day that scares you.”
I once met two brothers, students in my class, who – despite having characteristics of introverts – were outgoing, friendly, and always willing to tackle new challenges. Having lunch with them one day, I discovered their secret. Each and every morning, as their mother sent them off to school, their mother said: “Do one thing today that scares you.”
We must realize that our brains are hard-wired, from the days of the cave men, to flee from danger. But in today’s society, where interpersonal skills are so highly valued, we need to learn to overcome fear. Otherwise fear prevents us from achieving, and it takes a far greater bite out of our life than we should permit it to do.
While not all fears should be overcome, many fears cause us to be anxious in social situations. To overcome these and related fears, each of us needs to seek to “expand our comfort zone.”
As you expand your comfort zone, you actually grow as a person to fill out these new boundaries.
If you have a larger comfort zone, and continue to push the edges of it out, you really do grow as an individual – you have more experiences, undertake more learning, and acquire more wisdom.
Understand the Need to Say “Yes”!
In the 2008 movie “Yes Man,” Jim Carrey plays Carl, who reluctantly promises to stop being a "No Man" and vows to answer "Yes!" to every opportunity, request or invitation that presents itself thereafter. While the result (in the movie) is both hilarious and, at times, moving, the movie is actually based upon a real experiment. In fact, after the movie, some individuals chose to say “Yes!” for an entire week. Here’s one blog post indicating the results:
If saying “Yes!” to everything for a week is too much of a challenge, then consider an alternative – calculated activities to expand your “comfort zone.” For much of the past 30 years, I’ve taken on the challenge of expanding my comfort zone. Being a severe introvert, I first learned how to socialize at receptions and similar events (a skill I am still working on). I began to give speeches and presentations, first to small groups; this evolved into my current ability to give speeches to a several hundred or a few thousand people at various conferences without any undue nervousness.
Each and every one of us has her or his own “comfort zone.” Studies have shown that 40% of college students possess social anxiety – i.e., shyness. And the remaining 60% possess anxiety in other circumstances, such as public speaking, meeting someone new for the first time, etc. The truth is that each and every one of us can expand their comfort zone, significantly, over time. And college is a great place to undertake this effort.
Why do this? Life’s magic occurs largely outside your current comfort zone. If you want to suck all the marrow out of life, as I do, you need to be willing to put yourself out there into areas of “discomfort.” Then, as you adjust, you become more and more comfortable in those situations, thereby expanding your comfort zone, you actually grow as a person to fill out these new boundaries.
If you develop a larger comfort zone, and continue to push the edges of it out, you really do grow as an individual – you have more experiences, undertake more learning, and acquire more wisdom.
In short, you experience life more fully.
As an added bonus, when you interview for a job in your career field you will be a better interviewee, and job candidate. The better jobs go to the graduates who are more personable and well-rounded!
Your Assignment: 
First, watch the following TedX talk, only six minutes long: “Measuring Comfort Zones” by Marcus Taylor at TEDxMelbourne. (6 minutes).
Then, for each of the next nine weeks, choose two activities each week from the list below. Choose those activities that scare you – i.e., those activities that expand your comfort zone. Please note that you may not repeat any activity.
At the end of each week, you should write down your progress in your journal. Schedule a reminder on your smart phone for the same day and time, once a week for nine weeks, to record your journal entries.
Your journal entries might start off in the following manner:
I expanded my comfort zone over the past week by undertaking two activities I would not have normally undertaken.
For the first activity I … (Describe the activity. What was the result for you? How did it make you feel?) As a result of all of this experience, I have realized that ….
For the second activity I … (Describe the activity. What was the result for you? How did it make you feel?) As a result of all of this experience, I have realized that ….
Here are the activities to choose from:
  1. Eat something different – a food item you have not tried in at least a year.
  2. Give at least three people compliments on any day, when you normally would not (counts as one activity).
  3.  Smile at (all) strangers, and say “Good morning” or “Good afternoon” or “Hi” to all the people you pass by, for one entire day – and wherever you are!
  4. Get to sleep (bed) one hour earlier for four nights straight, and at the same time each night (this counts as one activity).
  5. Speak up in a class – when you normally would not speak up.
  6.  Go to an on-campus event or which you typically would not go to, or engage in a new activity on-campus.
  7. Thank a friend or family member for their ongoing support.
  8. Tell someone they are loved.
  9. Let go of your self-judgment for a day. And do something others would never think you would do. Feel good about yourself. If others think ill of you – they do not matter; they are no longer part of your personal universe.
  10. Perform on Karaoke night.
  11. Show three friends or acquaintances the benefits of the “Power Pose” and show them the video (Google search: “TedX Power Pose”).
  12. Unplug your t.v. and video games for one entire week.
  13.  Use the writing center on-campus for assistance in reviewing the draft of an essay or paper.
  14.  Do your math homework in the math lab, seeking assistance when needed.
  15. Ask for a tutor.
  16. Form a study group, or join one, during the next seven days.
  17. See a professor for guidance on “how to do better” in a particular class, or on a particular assignment.
  18. See a professor for tips or career paths and/or “how to best network to find jobs or internships.”
  19. Obtain counseling at the student health center to talk through a problem or to seek ideas on how to relieve stress.
  20. Apologize to someone you have done wrong / admit you were wrong.
  21. Write a “personal log entry” in which you forgive someone for a wrong done to you. Let go of bitterness and anger. Let go of a grudge. (Whether you choose to communicate your forgiveness to the other person is up to you, and dependent upon the circumstances.)
  22. Perform three “random acts of kindness” in one day (counts as one activity). For ideas on random acts of kindness you might undertake, Google search the term “random acts of kindness.”
  23. Go up to a stranger in a student dining or coffee shop area. Introduce yourself and ask him or her if you can ask them a few questions, for an assignment you are working on. Find out the person’s name, major or occupation, hometown, and what they like most and least about the college or the program they are in.
  24. Change your group of friends (i.e., don’t “lie down with dogs”), or disassociate yourself over time from one friend who tends to drag you down.
  25. Undertake a civic engagement activity with others.
  26. Post a “success tip” once a day, each day, or your dorm room door or another place on campus, or on your social media page, for five straight days. Make certain you indicate below the success tip your identity, such as: “This success tip provided courtesy of (your name).”

These exercises can be powerful, if you approach them with an open mind and a view toward personal growth.
Take the challenge. Do six of the exercises above, and record the results.
Adopt the mantra of continual self-improvement, in all aspects of life.

Sunday, September 14, 2014

"I Choose to Excel" (A Message to Alfred State's Business Major Scholars)

For our Business Major Scholars …

I could walk around campus with earphones in, never smiling and never greeting any others. Or I could put a smile on my face, greet most who pass me by with a “Good morning” or “Good afternoon” or “How are you doing,” or – simply - “Hello.” I choose to excel.

I could not read the assigned material before each class, hoping that I will skate by just by listening to the professor and cramming before exams. Or I could read the text, answer sample questions, be prepared to participate in class discussions, and do well on all quizzes and exams. I choose to excel.

I could wait until the last possible moment to begin working on assignments. Or I could try to complete each assignment well in advance of the due date, even shortly after it is assigned, knowing that my ever-increasing self-discipline and self-control will serve me well in the real world. I choose to excel.

I could stay up late most nights, get a few hours of sleep, and arrive at class drowsy. Or I could get my 9 hours 15 minutes sleep (more or less, depending on individual needs), go to my classes and activities refreshed, and be more productive throughout the day. I choose to excel.

I could saunter about campus slowly, shuffling my feet, and generally try to look “cool.” Or I could walk tall, with good posture, at a good pace, and look to others as if I have a purpose. I choose to excel.

I could hold a grudge, and possess anger toward someone who did me wrong. Or I could write a letter to them exonerating them for their past actions toward me (regardless of whether or not the letter is delivered), free myself from any antagonism or resentment, and forgive and forget. I choose to excel.

I could write my required essays completely on my own. Or I could have a friend read my essay, travel to the Writing Center to have my essay reviewed and learn new tips on writing, and submit an even better essay with the likelihood of receiving a better grade. I choose to excel.

I could hang out with “friends” who study far too less and party, play video games, or watch t.v. far too much. Or I could realize that it is inevitable that if I hang out with those who choose not to excel, I will become like them. I could look for new friends, knowing that I am likely to become as successful (both in terms of personal relationships, and in terms of salary and wealth) as the average of my five closest friends. I choose to excel.

I could use my introversion as an excuse, by never asking questions in class nor engaging in class participation, hiding in the corner at the few parties I am dragged to attend, not joining any clubs or organizations, and not attending any on-campus events. Or I could realize that my introversion is a strength, as it permits me to perceive the world in a contemplative, reflective manner. And I could realize that I cannot use my introversion as an excuse – ever. I could also realize that most students, at some time, are scared of the challenge posed by the second greatest fear in life – meeting someone new. Hence, I could choose to gradually, incrementally push myself out of my comfort zone by doing one thing each day that scares me. I could choose to say “Yes” instead of “No” when asked to join in an activity. In so doing I will choose to make my life far richer and far more meaningful. I could choose to sit down with a student who is eating alone in the dining hall, asking the other student questions about their major, their life, and what they like about the college. In so doing, I could choose to possibly expand upon my number of friends. I choose to excel.

I could choose to abide by others’ expectations and judgments of me, living my life wondering if I am doing what is “acceptable” or “safe.” I could choose to always worry about how I look, how I talk, whether my make-up is well-applied, or whether I am always correct when I speak up in class or in a social situation. Or, I could realize that no one can put me down if I don’t let them. I could ask questions of my professors when I don't know the answer. I could live my life without fear of what others might say about me, enjoy each day in the manner I choose, and ignore put-downs by those whose worlds are so small that they must seek to often criticize others. I choose to live my life large. I choose to excel.

I could wait until my final semester to begin search for a job. Or, beginning in my second semester at college. I could make a list of all my contacts (including those who might be able to introduce me to employers in my field), attend the Alfred State Career Fairs each semester, undertake practice interviews, update and revise my résumé each semester, join and participate in clubs and organizations to enhance my attractiveness to employers, attend industry organization conferences and luncheons to network, and reach out to potential employers to “interview” them about their story, their successes and challenges, and seeking out career paths. I choose to excel.

I could blame others – my professors, my parents, my need to work to support myself, and/or my circumstances – for performing poorly in my classes. Or I could realize that I am responsible for my own success – no one else – and I could take charge of my own life. I choose to excel.

I could choose to go through life in a haphazard fashion, with big goals which always seem distant. Or I could choose to adopt S.M.A.R.T. goals every semester (or every few months), refer to them often, and undertake those actions which lead me toward their accomplishment. I could choose to live my life by design, not by default. I choose to excel.

I could choose to never be mindful of the world around me, forging through life always wondering why this did not occur or that did not happen, with little appreciation for the earth, its beauty, and the joys other people bring to my life. Or I could choose to treasure each and every day, expressing gratitude for little things such as the breath I take, a cool breeze, and a sunbeam on my face. I could choose to be thankful for the larger things such as the love of my family and friends; I could choose to let them know – simply by telling them that I love them and I appreciate them and all they do for me. I choose to excel.

Here are my 12 Key Tips for Success in College
Adopt a mindset of continual self-improvement and personal growth.
Obtain 9 hours 15 minutes (on average) of sleep to become more productive and to increase your capacity to learn.
When obstacles are presented, use your grit to persevere. Accept personal responsibility for your own success.
Possess S.M.A.R.T. goals – and review them daily.
Don’t let others’ views – or your own limiting views – define your own future.
Don’t lie down with dogs. Choose friends who also desire to be successful, and who work hard to be such!
Ooze confidence! (If you lack confidence, fake it until you become it! It works!)
Epand your “comfort zone” – do one thing each day that scares you!
Choose to want to succeed as much as you want to breathe.
Live one day at a time. Be thankful that each day brings forth a new opportunity.
Express gratitude to others, always.
Practice kindness, compassion, and empathy.

Challenge yourself to become a better person – and student – each and every day.
Thank you!
Professor Ron Rhoades
If you are feeling overly anxious, perplexed, and don’t know where else to turn, “SEE ‘DA BEAR.” I’m in Room 301 (in the inner office, past the copier), E.J. Brown Hall. If you desire an appointment, please e-mail me at
Thank you.
Professor Rhoades

Ron A. Rhoades, JD, CFP®
Asst. Professor, Business Department
Curriculum Coordinator, Financial Planning Program
Alfred State (SUNY)
10 Upper College Drive
Room 301, E.J. Brown Hall
Alfred, NY 14802
Phone: 607-587-3469

Discover the transformational power of small class sizes, caring faculty who know you and call you by your first name, and a college dedicated to enabling you to succeed in all aspects of life.

We are a diverse, caring community of scholars, committed to succeed. We Are … Alfred State! Where ... It Matters!

For more information about Prof. Rhoades, please visit:

Friday, September 5, 2014

Evidence of Harm, Part 1: Investors Flee the Capital Markets Forever, Ending Their Hopes and Dreams

"Where is the evidence of harm?" Opponents of the fiduciary standard often ask this question. Permit me to find evidence, over the course of several blog posts.

While these may seem like isolated stories - they are not. I have dealt with hundreds of individual investors, and have seen these stories repeated over and over and over again. I have also discussed, with other fiduciary investment and financial advisors - the huge amount of harm which consumers of non-fiduciary advisors suffer today. At a certain point, the volume of seemingly anecdotal evidence reaches a compelling mass, and becomes admissible evidence in both tribunals and in the context of cost-benefit analyses in rule-making endeavors.

Here is the first tale of ... evidence of harm.

It was October 2006. The stock market had recovered from the substantial downturn seen in 2001-2003. Before me were prospective clients, a husband and wife both in their late 50's, who were seeking financial advice. I will call them "John and Jane Doe" in order to keep their names confidential.

John and Jane possessed a nice nest egg, but it was far smaller than it had been in 2000, and was even smaller (despite ongoing contributions) than it was twelve years before, in 1994.

In the mid-1990's John and Jane Doe thought they were on the path to an early retirement - by age 60. Indeed they were, at the time.

But then John and Jane encountered a "wealth manager," who I will call "Jake." Jake commenced, as a broker, the management of their portfolio. Some well-diversified stock and bond mutual funds were initially purchased, which I learned were Class A shares - with commissions ranging from 3% to 5.75% (depending on amounts invested), and nearly all also had 12b-1 fees of 0.25% a year (in addition to fund management fees, which ranged as high as nearly 2%).

But then, as the stock market took off in the late 1990's, Jake's investment strategy changed. By mid-1999 Jake had advised the clients to move all of their funds into high-flying technology stocks. Despite incurring capital gains in making the move (and despite the fact that sales loads had been paid to enter the mutual funds sold just a few years before), the clients agreed.

Of course, technology stocks then crashed, commencing in 2000. Yet, it was only late 2001 that Jake changed his investment strategy again, to become far more conservative. Jake recommended some high-cost variable annuities to the clients, with investments in a mix of high-cost stock funds and bond funds within the annuities. But, despite the allure of the "guaranteed returns" Jake promised that these variable annuities possessed, this time John and Jane Doe balked. John and Jane had Jake liquidate all of their investments, and they then purchased CDs at several local banks.

Five years later John and Jane Doe were before me as prospective clients. After gathering facts, and analyzing what had occurred, I patiently explained the mistakes of the past. And, I explained, in order to achieve their long-term goals in retirement, a portion of their investments should be in well-diversified, low-cost stock mutual funds. Another portion should be in fixed income investments - such as bonds of high-quality, and/or investment-grade diversified bond funds, and/or CDs. With a proposed Investment Policy Statement in hand, and with recommendations of a strategic asset allocation and selections of low-cost, tax-efficient stock funds and low-cost bond funds and laddered CDs, I felt very confident in my proposal to them.

John and Jane Doe listened, but I could tell they were not receptive. Upon inquiry, John informed me: "You don't understand. We will NEVER invest in stocks or bonds again. We will ONLY invest in bank C.D.s."

I spent two more meetings with them, exploring their fears, and explaining probabilities in accomplishing their goals over the long term with a C.D.-only strategy versus a more diversified portfolio. Despite patient instruction, John and Joe Doe never budged off their stance. They would NEVER, EVER invest in stocks or bonds again - all their savings would be kept "safe" in their local banks.

Their trust had been betrayed.

They felt like they had consulted an expert. But the "Wealth Manager" they consulted turned out to not have any education in investment strategies.

They felt like they were being represented by someone who was acting in their best interests. But, as they had been told before, and I confirmed, Jake their "Wealth Manager" was only a registered representative, and neither he nor his firm was likely to be considered a "fiduciary" to them.

So, where was the harm? In the higher fees and costs they paid. From a review of all of their brokerage statements from 1995-2001, when advised by Jake, I estimated their "total fees and costs" averaged about 2.75% or higher, on an annual basis. Excessive, especially since none of the investment strategies employed generated above-market returns.

But this was not the worst harm suffered.

The harm was also in the horribly tax-inefficient portfolio. The actively managed stock mutual funds placed in their taxable accounts generated huge realized taxable gains. There was no consideration that appeared to be given as to correct placement of different types of assets, as between the taxable and tax-deferred accounts of John and Jane Doe.

But this was not the worst harm suffered.

The harm which was even more severe was the loss of John and Jane Doe's participation in the capital markets. Academic research has revealed that individual investors who are unable to trust their financial advisors are less likely to participate in the capital markets. [“We find that trusting individuals are significantly more likely to buy stocks and risky assets and, conditional on investing in stock, they invest a larger share of their wealth in it. This effect is economically very important: trusting others increases the probability of buying stock by 50% of the average sample probability and raises the share invested in stock by 3.4 percentage points … lack of trust can explain why individuals do not participate in the stock market even in the absence of any other friction … [W]e also show that, in practice, differences in trust across individuals and countries help explain why some invest in stocks, while others do not. Our simulations also suggest that this problem can be sufficiently severe to explain the percentage of wealthy people who do not invest in the stock market in the United States and the wide variation in this percentage across countries.” Guiso, Luigi, Sapienza, Paola and Zingales, Luigi. “Trusting the Stock Market” (May 2007); ECGI - Finance Working Paper No. 170/2007; CFS Working Paper No. 2005/27; CRSP Working Paper No. 602. Available at SSRN:]

But this was not the worst harm suffered.

Rather, the worst harm which was suffered was the demolition of John and Jane's hopes and dreams. Their inability to retire when they desired. Their inability to provide for the education of their grandchildren. Their diminished enjoyment of life.

Evidence of harm abounds, in the destroyed hopes and dreams of our fellow Americans.

It is time for a bona fide fiduciary standard to be imposed upon ALL providers of personalized investment and financial advice. It is time to establish standards mandating that a high degree of expertise be applied, and that decisions are made in the best interests of the client - at all times. It is time for a bona fide fiduciary standard, in which conflicts of interest are not just merely disclosed (since, as we all know, disclosures don't work), but rather that even for conflicts of interest which cannot be avoided a client is never asked to provide informed consent to be harmed.

It is time for the adoption of the FIVE CORE PRINCIPLES, as promoted by The Committee for the Fiduciary Standard, by all providers of investment and financial advice:

 • Put the client’s best interests first;
 • Act with prudence, that is, with the skill, care, diligence and good judgment of a professional;
 • Do not mislead clients--provide conspicuous, full and fair disclosure of all important facts;
 • Avoid conflicts of interest; and
 • Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

It is time that John and Jane's story never again be repeated, as it has so many times before.

IT IS TIME FOR THE FIDUCIARY STANDARD. Our fellow Americans deserve nothing less.

Learning About Integrity: The Experience of One Group of College Students

The e-mail had arrived Sunday evening, from a student in one of my classes. The Friday before I had to be in Washington, DC for some meetings, so I had our Department Secretary hand out exams in a class. The exam was not proctored; I had trusted my college students to be honest when taking the exam.

The e-mail started: “Dear Professor Rhoades. I’ve been torn all weekend. Finally, I decided to write to you. Friday, about halfway through the exam, several students started to share their answers with each other . But, please don’t ask me to tell you their names.”

Instantly, I was astounded. I had observed my classes take exams over the course of several semesters. I had not encountered any instances of cheating.

Then I was dismayed. Angry. I wondered, “What should I do?” No students had yet been identified. I felt betrayed, as if something had been stolen from me.

As I pondered my likely course of action, another e-mail arrived: “Dear Prof. Rhoades. I’m not a snitch, and I don’t want to name names. But it’s not fair to me, nor to others. I saw five students exchanging answers during Friday’s exam.”

I realized, at that moment, that this incident was not about me. It was not about my emotions. Rather, it was about the impact on my students. The days ahead needed to be handled in a fair manner – to address those who had cheated, and to address those who had not.

As my own emotions subsided, I began my research – about cheating. I found that cheating was widespread on college campus, even at the very best of schools. I suspected that cheating at my college was less, due in part to the small class sizes and the intensive interactions students have with the professors, and in part due to the fact that tests for plagiarism are done for nearly every essay submitted, in any class - a fact well-known by students.

I also learned from my research that cheating is more prevalent in the afternoon, as one’s self-control begins to lessen over the course of a day. And I learned that some students in college did not receive, as I had assumed, due to the students' socio-economic backgrounds, a strong grounding in concepts such as “ethics” and “integrity.” I learned that some college students, when asked, could not even generally define these terms.

I graded the exams, did a statistical analysis of the answers, along with a comparison to two prior exams. And then I revised my lesson for the next day ….

I began the class on Monday with my typical pre-1990’s musical selection. Students arrived and settled in their seats. I smiled as I jotted down attendance, as I usually do.

The 1:00 p.m. hour arrived, and I wrote on the board, “Integrity.” I asked the students to define it.

“Being truthful,” said one. Others chimed in: “Honesty.” “Being righteous.” “Adhering to your values.”

“These are good definitions. Let me provide another one. Integrity is doing the right thing, even when no one is watching.” Most students in the class nodded their assent. A few students began to look around at each other. A few others bowed their heads, as if afraid to look up.

I then showed the class a short video, “It is Just Me – Integrity,” available at

I then drew a triangle on the page. At the tips of the triangle I wrote three words: “Opportunity.” “Incentive.” “Rationalization.” We then engaged in a discussion of the “Fraud Triangle.” I explained to these students, all majors in business, that the Fraud Triangle consists of three conditions generally present when fraud occurs: (1) Incentive (i.e., pressure); (2) Opportunity; (3) and Rationalization.

We discussed how “rationalization” often leads to employee theft. How employees might feel, since they work hard, or do work better or faster than others, that they might become “entitled.” And how small employee thefts can result in a slippery slope, of ever-increasing frauds.

I then paused. For a full 30 seconds, I looked around the class, and looked each student in the eye.

“I need your assistance,” I stated. After yet another pregnant pause, I continued. “I have discerned that several students in this class committed fraud on last Friday’s exam. By me not being here, I provided an Opportunity. These students had an Incentive – they feel the pressure to get better grades. Somehow – I don’t know how – these students provided the Rationalization for their actions.”

Another pause, as I let the lesson sink in.

“I must admit, when I learned about this cheating, I was angry. I felt as if someone has stolen money from me. And I felt betrayed. My trust, in these students, has been violated.”

“Let me ask you a question,” I continued. “If your husband or wife, boyfriend or girlfriend cheats on you – violates your trust – how long will it be until your trust is restored.”

Just a few students answered. “A long, long time,” said one. “Never,” said another.

“That’s right. Think of it … when you violate the trust of a client, or a customer, or a friend, or a family member, or … a professor, that trust may be repaired over time, but it will never be fully restored.”

A student then asked me, “What are you going to do, about the students who cheated?”

I then turned the tables on them. “What should I do?”

As the class discussed same, we discussed penalties for cheating. In our department on campus, the first instance of cheating results in expulsion from the class and an “F” grade. A second instances results in expulsion from the college. I explained that some colleges were not so lenient.

We then explored whether I should try to force students to come forward, and tell me the names of who cheated. All students agreed that such would be unfair. I agreed – and explained that our student honor code, as it was worded, did not obligate students to inform on other students. I also explained that the honor code at other institutions – such as the one at West Point – did compel students to inform on those who cheated.

I then informed the students, “I’ve done a statistical analysis of the answers on the exam, and compared these exam scores with the two previous exams. I am certain I have identified five students who cheated, and two more students I have strong suspicions about. And I’m certain that, if I ask, some students will voluntarily come forth and provide me with the names of the culprits.”

Silence ensued. Then, I explored an alternative path. If the offending students came forth and confessed, suggested the students, these students could write an essay about integrity in lieu of being kicked out of class. I agreed, with the conditions, however, that if the students did not come forward within 24 hours, the punishment of expulsion from class and an “F” grade would be assessed. And, also, that the essay would be titled, “Understanding the Need for Integrity and Ethics in Business,” and would be 5,000 words long, and due in two weeks, immediately after the Thanksgiving holiday weekend. I also provided that a poorly written essay would not be accepted, and the original punishment (expulsion) would be imposed if the submitted essay did not receive the equivalent of at least a “C” grade.

The class nodded their assent.

A student then inquired, “But what about their grade on the exam?” With this perfect transition into the next portion of the lesson, I asked: “What do you think I should do about the grades on the exam?”

Discussion ensued. Perhaps the cheating had enabled some students to achieve 10% better on the exam. Perhaps other students had achieved 30% better. I opined that it was possible that one or two of the students I suspected, but could not yet prove, had cheated, would escape, and hence not receive any possible reduction in grade. “That’s not fair,” a student opined.

“I agree,” I responded. “What if, instead, the entire class re-took the exam on Wednesday.”

“That’s not fair, either,” chimed in one student. Another stated, “I really studied hard for this exam. Now you want to throw out the grades? That’s not right.”

As a class, we discussed the possible outcomes. Together we concluded that there was no solution that would be completely fair. We discussed that every honest person in the class had been stolen from, in some way, by the cheaters.

The class voted. With a strong minority present, the majority of the class decided to re-take the exam.

I then asked the students how they felt. “Angry,” replied many. “Really, really mad,” said one.

I explained my own reactions when I first learned of this. That I too felt angry, and betrayed.

But I had decided not to come to class mad. I cannot always control what others do, but I can control my own reaction. Rather than spend my day, or even my week, angry and depressed, I made a conscious choice. To approach Monday as I tried to approach every day – positively, with a good spirit, and wearing a firmly affixed smile.

The class was dismissed. The discussions, as students left, continued … as I hoped they would.

By the next day six students had come forward and accepted their punishment. Another, whom I strongly suspected, never did come forth. But, without compelling evidence, I was not in a position to make charges.

The essays were turned in, assessed, and all students had done well. I made comments and returned the essays.

As for the exam, all students but four (three of whom had come forth and confessed to cheating, and the other was the student whom I strongly suspected of cheating but who did not come forward) performed either the same or better on the exam re-take. The students in the vocal minority, who had protested against re-taking the exam, all did better. In fact, the most vocal of those who protested re-taking the exam possessed the best improvement, numerically. The view that re-taking the exam was “unfair” was therefore dissipated.

It is a full year later, and I continue to think about the incident. I have learned my lesson – don’t provide the “Opportunity” – make certain all exams are proctored. It also seems far easier for me to take additional safeguards, than to later put students into a situation where they must choose to report on a fellow student.

I also learned, through this and other class discussions on ethics, that many students lack foundational knowledge of these important steps. Hence, I spend much more time in the classes I teach in addressing the Fraud Triangle, as well as undertaking team exercises involving integrity, trust, and ethical issues.

It remains frustrating that I never did possess, via any informing student, the actual names of the students who had cheated. While six came forward voluntarily, others may have existed, and may have as a result "gotten away" with cheating. Hence I wonder, in retrospect, if I should have put pressure on students to “name names” – especially the students who had e-mailed me that Sunday night. But, imposing such pressure did not seem right to me at the time, nor does it seem right to me now.

I wonder if our college's honor code should be revised, to mandate that students who observe cheating testify against their peers. It seems, however, that few institutions impose such an obligation.

I ponder how to change the culture of cheating on campus, and how that might affect the willingness of students to "whistle-blow." At a college where greater than 80% of the students reside in dorms, and where the relatively small student body means that a fact or rumor about a student can be devastating, with regard to that student's reputation or interactions with other students, I wonder if whistle-blowing would be counter-productive. If whistle-blowing were to be encouraged, perhaps this can be done by educating students on the impact of cheating - on students who don't cheat, and with regard to the impact on society in general of such behaviors (especially if they persist beyond college).

The students who cheated are still on my campus now - a year later. As I pass them in the hall, we often pause to chat. At times, with a few, we have had deeper conversations about specific concerns they possess. From such interactions I believe the lessons of those few weeks – the class, the later discussions that I’m certain ensued among peers, and the essay composition – seemed to “sink in” for three of the students. The other three – I’m not so certain.

What do you think? How could the situation have been handled differently? If this same set of facts were to occur in the future, would you advise a different course of action? Should students be mandated, or encouraged, to whistle-blow?