One of the major reasons that advocates recommend the fiduciary standard is the belief that if only everyone were subject to the standard, fewer client abuses would occur, because advisors would fear the repercussions (i.e., legal liability) of inappropriate recommendations that fail to meet the standard. Yet at the same time, the financial services industry has been plagued with scandals, and it's not just Bernie Madoff, Allen Stanford, and numerous commission-based advisor improprieties; in the past three years, there have even been investigations against two former NAPFA presidents for malfeasance. Which raises the question - if even people who have led such a fiduciary-centric organization as NAPFA can still conduct such misdeeds, does fiduciary really provide the necessary consumer protections? Or is the fiduciary standard really only effective for those who weren't likely to violate its principles anyway?

The inspiration for today's blog post is a striking conversation I had with a fellow planner recently, who argued passionately that if only we could widely adopt the fiduciary standard, public abuses in financial services would cease. "If only we could step away from FINRA's rules-based regulation," he said, "with its continuous back-and-forth as the regulator writes new rules and abusive advisors come up with ways to work around those rules to avoid any adverse consequences - and adopt a principles-based fiduciary standard that would just call a spade a spade (or an inappropriate sale an inappropriate sale), the world would be a better place."

Certainly, I'm not a fan of the current FINRA regulatory environment, which does indeed sometimes seem to lead to compliance and regulation so obsessed with minutiae and rules that it loses sight of the point of oversight in the first place. But at the same time, I wonder if we're taking too optimistic of a view regarding the benefits of a fiduciary standard.

After all, if there's one thing that we've seen in recent years, it's that people can make some pretty poor decisions and do some very horrible things, regardless of their awareness of the rules involved and the repercussions. From the kickback allegations against former NAPFA President Jim Putman, to the $46 million of fraud allegations against another former NAPFA President Mark Spangler, to the multi-billion dollar Ponzi scheme perpetrated by former NASDAQ chairman Bernie Madoff, it's clearly possible for people who should clearly know better to do some pretty bad stuff.

Granted, some of the aforementioned individuals were no longer operating within a fiduciary standard in the businesses they were running at the time that their crimes occurred, but that's not the point. The point is that some of them perpetrated crimes so severe, it trascended the legitimacy of ANY set of rules and laws... and the fact that it was illegal, and that the repercussions would be severe, apparently were quite insufficient to disincentivize the behavior and protect the public.

So where does that leave the fiduciary standard? Certainly, those who genuinely wish to act solely in their clients' interests will operate effectively under the standard, and may welcome it as an alternative to the FINRA rules-based style of regulation. But how does the fiduciary standard protect the public when someone enters the industry with the explicit intent to defraud clients, steal their money, or do some other spectacularly inappropriate stuff? After all, as the preceding examples have shown, just knowing that a behavior is wrong, that we can all agree it's wrong, and that such wrongdoing will have significant negative repercussions, is not itself enough to protect the public from some real damage when someone is intent on putting their short-term personal gain above their clients' interests (and above their own long-term interests).

I'm not trying to suggest that the fiduciary standard is a bad direction to go for the profession. Ultimately, I think it's absolutely the right standard to apply for the delivery of advice, which should only ever be offered solely in the interests of the client, period. But I do wonder sometimes if we're wearing rose-colored glasses when we suggest that if only the fiduciary standard were adopted, wrong-doing would end as the less reputable flee its potential legal ramifications in acknowledgement that they can no longer wriggle out of punishments through rule loopholes.

In fact, one of my greatest fears is the possibility that the opposite could occur! What if a step away from the excruciatingly detailed FINRA oversight led to a rise in outright investor fraud, as the best of the best adopted the standard in their clients' best interests while the worst of the worst were attracted to the new regulatory environment as an opportunity to steal as much client money as possible before anyone noticed or before the next regulator came to examine their office? After all, while the current once-a-decade oversight of the SEC is clearly lacking, the reality is that the once-every-four-years office inspection schedule advocated by the recent Baucus bill would probably still be 3.9 years too late to catch an advisor intent on stealing client money between exam periods!

In other words, put yourself in the shoes of someone whose express intent is to profit at the expense of others, whether by legal or illegal means. If you had an intent to cause such harm for your own personal benefit, which regulatory environment would be more likely to prevent you from succeeding? A principles-based regulatory structure that left much of the oversight to a Chief Compliance Officer you named yourself, who would be in a whole bunch of trouble if/when you were eventually caught (assuming you could even be found with your clients' money when the time came!), or FINRA's current rules-based paperwork-intensive oversight structure with a never-ending series of compliance checks and reviews that make it difficult for you to do anything with your clients' money without someone noticing? 

Because I have to admit, if my goal was in fact to maximize my personal gain, regardless of the harm to my clients, I'm not certain that a principles-based fiduciary standard is going to stop me. Or even slow me down. In fact, the rules reduction might even make it easier for me to perpetrate my crime. Perhaps that means the reality is that the regulatory structure for real protection of the public needs to be closer to the FINRA framework - whether it's FINRA itself or another SRO - than we care to admit?

So what do you think? Does the fiduciary standard and SEC-style oversight really offer the necessary consumer protections for clients? Are the enhanced consequences for wrongdoing really sufficient to deter those who already have an intent to profit at the expense of others, or is the fiduciary standard only effective at striking fear in the hearts of those who were likely to comply with the rules anyway? Should the optimal consumer protection be closer to an SEC-style principles-based framework, or a FINRA-style rules-based approach? 

  • Scott Beaudin

    It makes no sense to me to put 99.9% of honest advisors into a FINRA straight-jacket to protect the public from the .1% fraudster. The cost to the public of receiving dumb-downed financial advice will be far greater than that realized by stopping a few crooks.

  • Charlo Maurer

    As much as I am proud of the fee-only fiduciary standard, I know that the reason I am honest in my practice is not because of the standard, it’s because I’m an honest person who would not do anything in my clients’ accounts to make the most money possible. I think you’re right, the standard will not eliminate fraud, though I don’t think it hurts to publicly state that in your business you act in the best interest of your clients.

  • jim schwartz


    Barbara Roper once said to me that all fraud and abuse is a matter of compensation. Now fiduciary status gives some additional recourse – but the horse is already out of the barn.

    The question is interdiction -if possible.

    To this end – 3 times in Colorado I authored legislation (fought tooth and nail by FPA, the state insecurities omissioner Phil Feigin and yes the CPAs’) that would require those acting functionally in a financial planning capacity (later just a financial advisor) to disclose an estimate upfront of all compensation – including trips and quarterly to provide actual compensation received.

    Of course, in the industry said this was onerous – but what adviser doesn’t estimate upfront what a prospect can bring to the practice?

    While fiduciary status brings a sanction – and maybe give additionalrecourse (giving the adviser second thoughts) the estimate upfront gives evidence – more damning.

    In any event, fiduciary status is a tool not the be all end all to prevent or minimize advisers taking advantage of the ‘substitute reliance’ the client gives.

    As far as self regulation is concerned – I produced for hearings a baseball card with a picture of Phillips Milk of Magnesia. The caption was Self Regulation – A Crap Game.

    jim schwartz

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