But, It Protects People
Not really. It protects regulators in that it provides them with a set of rules to apply retroactively to people who have breached some imaginary standard. There is no possible way for anyone to fulfill fiduciary responsibilities. Regulatory convenience is not a societal value.
That does not mean advisors can be careless or selfish.
It means that an advisor working in a conscientious fashion with a client who understands their own needs and responsibilities should be a sufficient relationship.
If an advisor harms a client by carelessness or something other than fair-dealing, there are laws that deal with that now. Making it convenient for regulators is not a value that is big enough to offset the cost to comply with meaningless and poorly conceived rules.
Fiduciaries must have a clear understanding of the future
And none do. The future is unknowable and at least one of the best intentioned and carefully explained products or processes will eventually fail. Fiduciary rules are possibly useful in a world where nothing ever changes. In a dynamic world, the best plan today could easily become the worst idea possible in ten years.
How do he rules deal with that?
They do not.
Fiduciaries must have a clear understanding of their client.
I think that is a reasonable standard and good advisors already work towards that. Clients are only sometimes rational when explaining their hopes, fears and expectations. They are seldom exactly rational when explaining their risk tolerance. Most are emotional under stress and many have not experienced enough adversity to understand how they behave when things are unpleasant.
Advisors always do better if they can educate their clients to the point where they understand more about themselves.
As we discovered in late 2008 and early 2009, even the most risk tolerant, sophisticated clients are not tolerant of 35% losses. It is a worthwhile thing for clients to address how they might respond to a market that dropped 50%. According to Warren Buffett, their portfolio has experienced that twice.
Advisors need to work harder at this aspect.
The dimensions of fiduciary duty are opinion not fact
Every jurisdiction has rules and court precedents for what constitutes the reasonable action of a trustee or fiduciary. There are states that do not allow a pension fund to exceed some percentage of assets in common stocks. If New York’s state pension cannot invest in common stocks at all, is that responsible? Seems to me you just trade variability and probable long term gain with stocks, for certain losses in purchasing power with bonds. Maybe not losing nominal value of a bond is more important than inflationary losses.
If the definition of fiduciary does not consider global risk and opportunity, and if it ignores human emotions and human frailty, what good is it? If it does not anticipate change is it of value? If the rules exist for the convenience and empowerment of regulators, do we need the rule? I have not seen numbers, but I doubt there is a large percentage of advisors whose planning services and advice could be seen to be unreasonable.
Thoughts for today
- Could any individual, looking after their own affairs, succeed against a case of breach of fiduciary duty brought against them by a regulator? Probably not. They would make mistakes too. Even holding a seemingly clear idea of their own wants and needs, and their own capability and emotional makeup, they would fail some of the time. If the client could not meet their own fiduciary responsibility, what chance would an advisor have to get it right?
- Is a sometimes uninformed or obsolete opinion of what fiduciary responsibility means better than a reasonableness test?
- Is making a set of rules that expands enforcement and makes it more convenient for regulators, a value to society as a whole, or are there laws now that would deal with the egregious situations? You have to notice that regulators did not find Bernie Madoff and even after being tipped to the near certain existence of the fraud, they did nothing for years.
- Do financially illiterate clients remain that way because they think somehow the laws will protect them?
It is time for adults to behave as adults and forget the Big Brother will protect us idea.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.
In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772