Financial Planning

The Compass

The rule governing your financial professional's actions is less important than the ethical compass that guides them.

Which of these two factors more often determines your behavior: rules or values?

To me, the answer is clear: values. In my view, how your financial professional implements his or her values to benefit you is the key to selecting a manager—not whether the set of rules they operate under amount to the fiduciary or suitability standard.

Congress seems to disagree with me—they're in the rules business, and it seems they think rules matter more (considering their track record, this implies I’m right). In 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress mandated a review of the fiduciary standard, with the aim of potentially expanding it to cover the entire industry. What’s the fiduciary standard? It’s a concept governing some in the investment world that requires advisers to put an investor's interests before their own—to make a recommendation they reasonably believe positions the client to reach his or her financial goals and disclose potential known conflicts of interest. Today, all registered investment advisers (RIAs) like MarketMinder’s parent company and my employer, Fisher Investments, are subject to the fiduciary standard. At the end of 2012, there were just over 10,500 SEC-registered RIAs. More, typically small advisers by assets under management, are registered at the state level exclusively.

By contrast, many of the 630,000 registered representatives are held to just the suitability standard. Under this rule, investments sold to a client must be suitable, but not necessarily those the broker believes best position the client to reach their goals. The suitability standard contains no requirement stating a representative (broker, financial advisor, financial consultant, etc.) put clients’ interests first and doesn’t require disclosure of the conflicts potentially arising based on differing forms of compensation. This is the group Congress wants to cover with its proposed fiduciary rule expansion. The Department of Labor (DoL) wants to similarly expand the fiduciary standard to cover anyone advising a retirement plan (IRA, 401(k), etc.). To date, there have been proposals, talk and comment letters—even a contrary bill that seeks to effectively delay the DoL, which seems to be moving faster toward the fiduciary standard. In my opinion, however, the rule is nearly meaningless in most cases—the beliefs, the structure, the knowledge matter. And that’s true regardless of the rule you operate under.

Having read the two preceding paragraphs, you now know more about this subject than the lion’s share of Americans. According to a 2010 survey, nearly 80% of American investors have no idea brokers and advisers are held to different standards. Maybe more should. But in reality, if the only reason an adviser puts your interests first is they’re required to, you don’t have very much of an adviser.

The fiduciary standard is really only the baseline; a minimum for those subject to it. It's effectively how you enter the business, but has little if anything to do with how you actually do business. The messaging is right, but a rule doesn't mean the same thing to all subject to it—it doesn't even mean everyone subject follows it meaningfully.

The rule doesn’t determine how you act; your values do. Now, this isn’t to say the fiduciary standard does nothing. To be clear, there are conflicts of interest on Wall Street and it’s entirely possible broadening this standard would benefit investors to an extent. But it is not the magic bullet to curing all that ails Wall Street. Conflicts of interest arise from cultural issues—companies and individuals who lack simple values—like being guided by a sense that investors’ interests should always and everywhere come first. The fiduciary standard meshes well with such beliefs, but it isn't guiding them. Putting investors first requires much more than simply being subject to a rule that leaves a lot to interpretation, in my view. The idea of putting investors first gave birth to the fiduciary standard—this is not a chicken-or-egg argument. To believe rules determine values is to believe murder is only wrong because it's illegal—an obvious fallacy. The law, the rule, is mostly a formality.

But being guided by values isn't merely a noble notion, it is what many mega-successful businesses do. Apple, for example, set out to make the world “Think Different” and in the process made kajillions. Disney's wowed children for generations because it places strong value and emphasis on imagination, optimism and creativity. There is nothing special about the financial world preventing a financially successful approach that hinges on principles.

However, just having principles isn't enough! Not all advisers, brokers, investment-type folks are equipped to make putting investors first meaningful. Not all advisers have the same experience and understanding. They don’t have the same resources and structure. If your RIA lacks significant experience and expertise, how can you know they’re not chock full of industry mythology? Or pure book learning with little real world application? What if your adviser simply doesn’t get how markets really work? What if they have all the right beliefs, all the right thoughts and zero resources? Do the first two matter?

Can they make putting investors first more than a slogan?

The single best way to find the right manager for you is to ask them what they believe in—and how they plan to implement those beliefs to your benefit. The fiduciary standard is a fine thing, and I won’t mind if it’s expanded. But neither you nor the government should think this matters much or is some revolutionary change for markets. The revolution that actually puts clients' interests at the forefront of this industry can only be launched from within.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.