Money Cents Newsletter - March 8, 2010

Fiduciary Standards and Congress

The Fee-Only™ planning community is held to a "fiduciary standard" - a legal standard of conduct which requires us to place the client’s interest first and foremost.  Registered representatives of the “name” brokerage firms are only held to a lesser “suitability” standard in working with their clients.  As such, we believe the very best framework for professionals to work with clients is the fiduciary standard.  That's why we're angry over something that happened in the Senate this month: Senator Tim Johnson of South Dakota inserted an amendment into the new regulatory reform bill--and, with the casual stroke of a pen, eliminated an important and powerful consumer protection.

This amendment cuts out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary.  Senator Johnson wants the Senate to "study" the issue instead.

Why should you care?

The fiduciary standard is a legal concept, but its core idea is not complicated.  To act as a fiduciary means professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations solely and completely in the best interests of people like you, our clients.

In other words, our recommendations must be made with only one commitment. Is this the best advice I (the professional) can give you, based on my knowledge about you and your needs and wants?

So what does it mean NOT to be a fiduciary?  Imagine there were two kinds of health practitioners in the world.  One group functions much like doctors today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution they believe is the very best course of treatment, and you pay them directly for this service.

The other group of health care providers operates somewhat differently.  They're employed in the branch office of a large multinational health conglomerate which requires its employees to recommend certain treatments which are most profitable to the company, so long as these treatments are considered to be "suitable”. 

These might not be the best treatments, but under a set of very complicated regulations, these less-than-ideal prescriptions are deemed to be legally-defensible ways to address certain medical problems.  These health care providers are paid by the company according to how many of these treatments they can “sell”.

Now imagine that these larger companies, because of the very high profits they're making on these treatments, are able to gain a lot of influence over the process that decides which treatments are "suitable."  In fact, their executives sit on the governing board of the organization that makes these determinations.

Finally, imagine something went horribly wrong.  Several of the most popular treatments these non-fiduciary medical professionals were eagerly peddling to their "patients" were not as their companies portrayed them.  The result: catastrophic consequences, pain and suffering throughout the world.  An enormous mess.

To bring the analogy back to the financial world, these terrible treatments (investments) actually DID bring the global economy to the brink of financial collapse, a mess that required our taxpayer money to fix.  These companies had become so entwined in the system the government had no choice but to help them recoup the staggering losses they brought upon themselves.

Not surprisingly, an outraged public demanded that this must never happen again.  To the real fiduciary practitioners, the solution is clear: require all financial services firms to act in the best interests of their customers/clients by imposing a fiduciary standard. No more shady “suitable treatments”. 

We were encouraged when Congress drafted legislation which, among other things, would bring every provider of financial advice under a fiduciary standard.

The recent catastrophic financial events - the global meltdown, TARP, massive losses in the stock market, the longest recession since the 1930’s - are beginning to fade from memory. The companies providing “suitable” non-fiduciary advice have quietly retreated back to business as usual. Yet, a Senator from South Dakota has inserted a provision into the reform bill stating instead of imposing a “fiduciary” requirement, instead Congress should “study” the issue. After the Madoff and Stanford scandals, Congress should attempt to intervene for the rights of all financial consumers. By passing the buck on the “fiduciary” standard, Congress is creating another scandal for all American citizens!

The Senate has decided to leave fiduciary out of the final bill.  Even the Wall Street Journal is outraged—as this link to a strongly-worded column clearly explains what happened:

This article illustrates how the legislative process favors the organizations that take the most money out of the pockets of their customer.

It will speak volumes if newsletter recipients, their families, friends and colleagues called their Senator and Congressperson. Express your concern and anger that the “fiduciary” standard is being compromised. A groundswell of public opinion will show our elected representatives we will never forget the recent catastrophic financial events. Currently, lobbying on your behalf are the “fiduciary” professionals and their professional associations, such as NAPFA, FPA and the CFP Board of Standards. We need an overwhelming response to the Senators and Congresspersons to include the “fiduciary” standard in any financial reform legislation. Are Congressional representatives placing their own interests ahead of all American citizens not unlike the brokerage “suitability” firms?

Thank you in advance for your attention to this critical legislation and for voicing your opinion to your elected representatives.

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