Is there any issue more contentious than trust in the financial advice and wealth management business? No, probably not. But beyond a little gut instinct and a good referral, how do you really *know* who you can trust with your hard-earned dollars--especially given the shenanigans that some of the biggest financial institutions engaged in before and during the last crisis? It's a question the Institute for the Fiduciary Standard is trying to address.
On Jan. 29, the group proposed a set of best practices for investment advisers wanting to meet a "true" fiduciary standard. These best practices are really meant to serve as a guide for investors who seek an adviser who will put their best interests first-and who wouldn't? Knut A. Rostad, president of the Institute says the meaning of the fiduciary standard has been so warped in recent years by regulators, policymakers and lobbyists, that investors have a hard time sorting out who is really acting as a fiduciary and who is not. The best practices are up for public and industry comment, due March 9, and were put together with the help of Vanguard founder John C. Bogle, who co-chairs the Council of Advisors on the Best Practices initiative.
"What the best practices are all about is an attempt to speak directly to investors and give them a tool they can use to assess whether their 'advisor' is aligned with their interests or not and if not why not," said Michael Zeuner, co-founder of The Fiduciary Institute and Co-Founder/Managing Partner at WE Family Offices. "There's too much noise and confusion and investors are potentially misled as a result. Irrespective of what happens in the regulatory space, investors need a clear way to know whether their interests are being put first in an advisory relationship. Anyone can say they are putting your interests first but the practices require actions and deeds, not just words."
I recently caught up with Knut Rostad to talk about the timing of the release of the standards, how he thinks they will work, what kind of response he anticipates and his best case scenario. Ideally, he says, these will ultimately be adopted by regulators.
APRIL RUDIN: The fiduciary standard has been held up as an ideal for some time. What motivated the release of these best practices now?
KNUT ROSTAD: There has been a convergence of factors in recent years. Regulatory and industry failures have left brokers and advisers without important guidance. Ongoing reports of bad behavior from Wall Street, which the public generally associates with all financial professionals, has resulted in the worst investor distrust since the 1930s, according to Professor Tamar Frankel. Many investors see brokers and advisers no differently than Bernie Madoff. Most importantly, investor confusion between advice givers and product sellers calls for providing investors new guidance in evaluating and selecting advisers and brokers.
RUDIN: You say in the release that in recent years the meaning of fiduciary has been transformed. How has it been transformed?
ROSTAD: Over the past six years the brokerage industry has worked particularly hard in Washington to redefine fiduciary advice to mean product sales. They have succeeded beyond their wildest expectations.
RUDIN: What does the fiduciary standard promoted by regulators, policymakers and brokerage lobbyists look like?
ROSTAD: For many (not all, by any means) policy makers and regulators, the fiduciary standard has come be be either irrelevant or harmful to investors' health. For those who claim it harms investors, they believe fiduciary duty destroys choices, raises costs and forces brokers to flee the market place. The underlying message: fiduciary is like hurricane Sandy.
RUDIN: Do you think that the best practices list will also be useful to advisers and brokers wanting to meet a true fiduciary standard?
ROSTAD: Absolutely.
RUDIN: How many advisers and brokers do you think actually put these best practices to use?
ROSTAD: The marketplace will tell us.
RUDIN: You say in your introduction to the best practices: Codes of ethics and practice standards are generally developed and administered in four phases: i.e.: discussion and analysis, recommended practices, required practices and verification or enforcement. Is this then considered the discussion and analysis phase? What would the Institute for the Fiduciary Standard ideally like to see happen as a result of the release of these best practices? Adoption and enforcement by regulators?
ROSTAD: Putting the Best Practices out for comment is the discussion and analysis phase. We then proceed to the required action and verification phases. Ideally, yes, the regulators would adopt and enforce the practices.
RUDIN: Is there enough of a will for that in the industry?
ROSTAD: I sense there is a far greater appetite for the true fiduciary standard in the industry then much conventional wisdom might suggest.
RUDIN: How do you expect the brokerage industry to fight back? Which of the best practices will be seen as most controversial?
ROSTAD: Hard to say because, even though many brokers meet or come close to meeting the Best Practices, the BD lobbyists essentially reject them all. I don't know how they will respond. You might ask them.
RUDIN: How did the Best Practices Board go about crafting these best practices? Which elements of the list were most difficult or challenging to write? Were there any disagreements over what to include and what to leave out of the final draft?
ROSTAD: The Best Practices Board followed the structure of the Six Core Fiduciary Duties set out by the Institute. The six duties are discussed here: http://www.thefiduciaryinstitute.org/wp-content/uploads/2013/09/InstituteSixCoreFiduciaryDuties.pdf
RUDIN: What kinds of comments/opposition do you expect?
ROSTAD: Frankly, I'm not sure what to expect.
RUDIN: You are working with outside experts to develop procedures that will make compliance with these best practices verifiable and measurable. Can you tell me a little bit about what is in the works and how these might look?
ROSTAD: All I can say now is that we are firmly committed to crafting verifiable practices. Investors and the markets expect no less.
RUDIN: How will a client actually use these best practices in their current form? Or are they meant to be significantly refined after public comment?
ROSTAD: In their final form we hope they will be used as a concrete benchmark against which investors can evaluate and select the professionals most aligned with their interests.