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The Wolf In Sheep’s Clothing: Fiduciary No More

by | Mar 9, 2010 | Articles

It is not enough to work diligently, competently and caringly on your behalf, we are fighting the tsunami of government regulation and lobbyist actions that create situations where the snake oil salesmen and Bernie Madoff’s of this world can prey upon honest clients like yourselves.  We believe that something called a “fiduciary standard” is the very best framework for professionals to work with our clients. A fiduciary standard means that in every thought, word, deed and action of an advisor, the interest of the client must come first. Any lesser standard means that the advisor places his/her or his/her company’s interest before you. (This is one of the reasons that banks were able to sell credit default swaps). That’s why we’re so angry over something that happened in the Senate very recently: Senator Tim Johnson of South Dakota inserted an amendment into the new regulatory reform bill; with the casual stroke of a pen, eliminated the “fiduciary standard” from the current legislation. We recognize that this wording provides important and powerful consumer protection.

This amendment cuts out part of the original bill that required everybody who gives investment advice to the public to act as a fiduciary. Currently, only people such as ourselves who hold themselves out as fiduciaries are subject to that standard.  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 we, professionals, unequivocally put aside our own financial interests, and the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you: our clients.

In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you, given what I know about who you are, your financial situation and what you want and need?

So what does it mean NOT to be a fiduciary? Imagine that there were two kinds of health practitioners in the world.  One group functions much like doctors do today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution that 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” for you. And suitable does not mean it is the best or even comparable for you. 

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 other health care providers are paid by the company according to how many of these treatments they can sell you.

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

Let’s bring the analogy back to the financial world; these terrible treatments (investments) actually DIDbring the global economy to the brink of financial collapse, a mess that required us (our taxpayer money) to fix. These companies had become so entwined in the system that 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, yes, that is us, the solution is obvious: require everybody to act in the best interests of their 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.

So here’s why professional financial services providers are angry.  Now that the catastrophic global meltdown, TARP, massive losses in the stock market and the longest recession since the 1930s is beginning to fade from memory, those companies that provide “suitable” non-fiduciary advice have gone back to business as usual; very quietly, a Senator from South Dakota has now inserted a provision into the reform bill saying that instead of imposing this fiduciary requirement, that instead Congress will “study” the issue.

The Senate has decided to leave fiduciary out of the final bill.  Even the Wall Street Journal is outraged – here’s a link to a strongly-worded column that clearly explains what happened:

Wall Street Journal Article

Here’s a link to another article, which talks about how the legislative process favors the organizations that take the most money out of the pockets of their customers:

Financial Planning Journal Article 

Rather than writing, “it would be nice if everybody called their Senator and Congressperson and said that they were just as angry as we are in the professional community”, we are asking you to take action and do so. In order to assist you the following link is a website that lists all the senators and congressmen’s telephone numbers:

US Senators’ Contact List

A groundswell of public opinion might make our elected representatives understand that we haven’t forgottenTARP and all the rest of it. Right now, the only people lobbying on your behalf are the professionals themselves, and there apparently aren’t enough of us (and our financial resources are not large enough) to get the attention of the Congressional representatives who may be looking out for their own interests more than ours.

If you value the kind of care and attention you receive from us, independent financial practitioners, please call or write your congressional representatives and express your outrage and concern. Everyone deserves fiduciary care.

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