While there has been ongoing discussion at both the Federal and state levels of how a fiduciary standard should be defined from a legal perspective, and to whom those standards should apply, there has not been much discussion on what it means to be a fiduciary from a moral perspective. Furthermore, this discussion has not addressed the ways in which acknowledging behavioral insights has complicated determining how a fiduciary ought to act, because, it’s actually simpler to determine the ‘best’ advice for a professional to give a client when the only considerations are financial in nature. If financial advisors, as fiduciaries, wish to incorporate behavioral considerations into how they advise clients, determining which course of action to suggest as ‘best’ becomes more complicated.
In this post, Derek Tharp – lead researcher at Kitces.com, and an assistant professor of finance at the University of Southern Maine – discusses his January 2018 Journal of Personal Finance research paper, “The Behaviorally-Enlightened Fiduciary: Addressing Moral Dilemmas Through a Decision-Theoretic Model of Moral Value Judgment”, where he examines whether a fiduciary has a duty to advise clients from a “behaviorally-enlightened” perspective (reaching a conclusion of ‘yes’), and explores some of the underappreciated moral dilemmas that result from advising clients from a behaviorally-informed perspective.
Why would a behaviorally-informed approach lead to an increase in moral dilemmas? Most importantly, advising clients based on something other than objective financial facts necessarily opens the door to acting paternalistically. Should a financial advisor tell a client about an ‘optimal’ solution if they think the mere process of doing so might lead to a worse outcome than just presenting a ‘realistic’ solution? What if they are just trying to nudge clients in the right direction? Where do advisors draw the line, or should they even be worrying about this in the first place?
Nevertheless, there are some circumstances where advisors are perhaps justified in acting paternalistically, but those circumstances are probably fairly rare and advisors should take seriously their duty of disclosure to clients. Specifically, if the potential upside of a non-disclosed strategy to a client is small, the potential down-side to a non-disclosed strategy to a client is large, and a fiduciary is reasonably justified in their beliefs regarding potential outcomes, then a fiduciary may be more likely to be justified in advising a client from a “behaviorally-enlightened” perspective.
Ultimately, the key point is that financial advisors, as fiduciaries, are faced with new moral dilemmas that arise from attempting to incorporate behavioral insights into how they advise clients. While much of the prior focus has been on the legal responsibilities that fiduciaries have to serve their clients, we need to spend time wrestling with moral considerations as well!