The past two years have witnessed the most dramatic reform ever in the treatment of fiduciary responsibility with dynamics on three levels affording an enormous opportunity for Financial Advisors.
On the corporate dynamic, it’s, “White collar (with an Hermes tie) crime”. Companies of all sizes, their Officers and Directors are being found liable for breaching their fiduciary responsibility to shareholders, especially 401(k) and ESOP participants by lying about the financial condition of their companies. This breach of fiduciary responsibility knows no discrimination—it has been perpetrated by big corporations, small corporations, foundations, endowments, and trusts. Ultimate responsibility rests at the highest corporate levels—CEOs, CFOs, Presidents, Officers, Boards of Directors, and Trustees. Victims from these billion dollar train wrecks are strewn from toney condos to trailer parks, and include your clients:
Employee 401K participants who dutifully followed the urgings of their management to continue investment in “The Company”, because its “good for everybody”. Presumably by “Everybody”, CEO Bullmoose meant “Me and my fat cat cronies”.
ESOP participants, socking nickels and dimes away for retirement blindly believing the financial lies being pandered to them by the Company ivory tower elite.
Shareholders who hate the reams of proxy voting garbage they get every February, and don’t read it, only to find out later that obscene bonuses have been authorized to Corporate bigwigs who have pandered away the company coffers, while gifting huge consulting contracts to their Saturday morning golfing partners at Dead Possum Country Club.
The resulting fraud being perpetrated upon the shareholders is being dealt with by regulatory fines and firings, followed by class action lawyers. Although, Dante would have dealt with it differently by turning up the heat.
On the Investment Management dynamic, it’s, “The Wall Street Tango, (OOOH, I love a little sidestep)”. Shareholders have been taken advantage of by mutual funds, broker dealers, investment management firms, independent RIAs, celebrities like Martha Stewart and industry insiders like Rich Grasso. Some unscrupulous investment management professionals have breached their responsibility to investors in situations like the following:
Late trading allowed favored investors to take advantage of after hours activities and trade on information not known by us.
Market timing of mutual funds gave certain firms an undisclosed advantage by allowing them to get in and out quickly while we poor long-term investor slobs are waiting for tomorrow’s USA Today to see how we’ve done.
Front running portfolio managers so fervently believed in their own research that they traded ahead of the rest of us to test it out.
Regulatory sales practice rules have been blatantly disregarded.
Revenue sharing deals have not been disclosed to investors.
401(k) expenses have been allowed to run rampant.
Principals have been arrested, barred from the industry, or “Retired”, and more than $3 Billion in regulatory fines have been assessed.
On the Financial Advisor dynamic, it’s, “The Financial Adviser Hall of Shame”. Clients have been ripped off perhaps intentionally, or even unintentionally, by untrained financial advisors, rogue financial advisors, and in some cases, criminals. In the first six months of 2004, there were 4384 arbitration cases filed by disgruntled investors. Not all are valid, but some are, and only 7% have been settled.
An Introduction to Fiduciary Responsibility, (or “ Who, Me?”)
Fiduciary responsibility is not rocket science. You can exhaust the legal definitions and interpretations of fiduciary under ERISA , the UPIA, and UMIFA, and come to the same conclusion we reach by describing it as, “The ethical treatment of Somebody Else’s Money.” The same legal treatises can be scoured to understand WHO has fiduciary duty, or we can simplify it as the courts have done,” A fiduciary is someone who is responsible for somebody else’s money.” Recent Courts have been consistently more eager to apply a sophisticated legal theory called the “Duck” theory (although not actually by that name). If it looks like a duck, walks like a duck, smells like a duck, and acts like a duck, it’s a duck. Forget about legal definitions, fiduciary status is being defined by the actions of the party in question. If the client believes the party is acting in a fiduciary capacity, that party will be one.
How does this impact YOU, and more importantly, what do you do about it? What we have as a result is an Opportunity for Financial Advisors because:
Advisors who guide their clients to investments based on fees earned instead of rendering independent, unconflicted investment advice are dead.
Financial Advisors, Investment Advisors, and fund managers who aggressively rush to raise new assets at the expense of their investment expertise integrity will be gone.
Investment recommendations without fiduciary responsibility are gone.
Advisors will be expected to evaluate investment options solely according to the client’s investment objectives, document their recommendations, fully explain market risks, provide full disclosure including all fees and cost comparisons, explain that past performance is an unreliable predictor of future performance, keep the investment process an ongoing one and be a fiduciary. Those that do will thrive in the new age of corporate and investment transparency.
Financial advisors who treat somebody else’s money with the ethical treatment demanded will be winners, and we will all benefit from a more open, more shareholder-oriented investing world.