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Fiduciary Advocate

By now, I’m sure most of you are familiar with the Committee for the Fiduciary Standard—but if not, well, it’s a group of prominent advisors who advocate that anybody who holds out as a financial planner or advisor be held to a strict fiduciary standard.  I participate in their discussions, though I’m not formally a member.

Every year, the Committee selects a worthy candidate to be given its “Fiduciary of the Year” award.  Past winners include Ron Rhoades, David Tittsworth, Skip Schweiss, Phyllis Borzi, Harold Evensky, Barbara Roper and, in 2016, the entire U.S. Department of Labor.  For the past few years, this award was given out at the Insider’s Forum conference—and this year, I was pleased to hand the award to Knut Rostad, who founded the Committee before moving over to found the Institute for the Fiduciary Standard (https://thefiduciaryinstitute.org/), a Virginia-based nonprofit membership organization that provides education, research policy analysis and advocacy to further the real fiduciary standard. 

Every year, the Institute organizes a virtual ‘conference’ of sorts, called Fiduciary September, whose speakers this year included Ron Rhoades of Western Kentucky University, Skip Schweiss of Sierra Investments, Harvard professor Robert Sitkoff, language expert Deborah Bosley, current SEC Commissioner Allison Herren Lee, former SEC Commissioner Kara Stein, and law professors Tamar Frankel Christine Lazaro and John C. Coffee.

Institute members are planners and planning firms who pledge to adhere to ten practices listed on the organization’s website, who, after attesting, are put on a registry of true fiduciary advisors.  Membership fees start at $250 a year for firms under $100 million in AUM and scale up from there; for firms whose revenue model doesn’t involve AUM (retainers, hourly or subscription) the cost is $175 a year per advisor.

The Committee’s leadership asked me to read this announcement as I handed off the award:

The Committee for the Fiduciary Standard is pleased to announce Knut A. Rostad as the recipient of the 2021 Fiduciary of the Year.

  Knut has tirelessly pursued the betterment of investment advisory services provided to individual investors by emphasizing the importance of maintaining true fiduciary standards.  Even before his involvement in creating the Committee for the Fiduciary Standard more than a decade ago (and then later The Institute for the Fiduciary Standard), he was intently focused on educating the industry and regulators about the true fiduciary standard and the essential need to follow the fundamental principles of the ‘40 Act standards of behavior.  His extraordinary commitment and knowledge of the legal and equitable requirements of the true fiduciary standard has moved the needle perceptibly in favor of the investing public.  Knut‘s influence on regulatory rulemaking and guidance over the past two decades has been vitally important to advancing the investment fiduciary cause.

  There is no better example of a fiduciary “freedom fighter” than Knut Rostad.  There is no doubt that Knut’s energy, passion and commitment have made an incredible difference   Anyone who has shirts printed that say “I survived the DOL Fiduciary Rule” and hats that say “The F Word Rocks” has taken zeal to a whole new – and certainly different – level!

  It is with great admiration and respect that The Committee for the Fiduciary Standard is thrilled to honor a man that certainly continues to Rock the Fiduciary world!

Fiduciary opportunities

I was able to catch up with Rostad after the award ceremony to find out where, in his view, we stand on fiduciary issues with the regulators and other stakeholders.  In the past, he has struck me as rather pessimistic about the scene in Washington, perhaps because he has faced decades of outright hostility to his message from regulators who largely came from a wirehouse background.  But this time, he seemed much more optimistic. 

“Because of the new SEC—where we now have three out of the five commissioners who understand what fiduciary advocates have to say,” he says, “we have the best opportunity to make progress on fiduciary advice and investor protection than we have since Arthur Levitt was chair 21 years ago.”

Notice that Rostad easily conflates the fiduciary standard and investor protection; to him, the two are sides of a coin.  The argument with the regulators is that the more they require all advisors (including, of course, wirehouse brokers who call themselves ‘advisors’) to behave as fiduciaries, the more likely investors will be to receive advice in their interests, quality investment counsel, low portfolio expenses and fewer conflicts getting in the way.

Rostad is currently focused on what he sees as our best chance for meaningful reform: getting the Commission to revise the Form CRS disclosure so that it provides a clearer explanation of the different business models of broker-dealers/wirehouses, on the one hand, and fiduciary RIAs registered with the SEC on the other.

“Going back and looking at history,” he says, “what is the problem when it comes to protecting retail investors?  Ever since our colleagues at Rand came out with their report,” he continues, answering his own question, “the problem has been defined as ‘investor confusion.’  For decades,” he says, “regulators have been wringing their hands over how we have all this investor confusion about who is held to what standard.”

The implication in this regulatory handwringing is that the investing public is simply not smart enough to understand what a broker does and the services provided by an advisor; that one is regulated by a sales entity (FINRA) and the other by a government regulator (the SEC); that one is defined by federal law to be in the business of facilitating transactions and marketing products (broker-dealers), while the other is held to a standard that is the opposite of sales: the fiduciary standard.

Rostad doesn’t believe investors are too stupid to understand the difference.  He thinks that the distinction has been deliberately (and very effectively) blurred by the brokerage industry, which advertises itself as helping facilitate peoples’ dreams with financial planning and investment advice, whose brokers call themselves, on their business cards, advisors, vice presidents of investments or wealth managers.

“If you drill down on what is confusing the public,” says Rostad, “I believe that an objective view would conclude that it is the language being used by the brokerage industry.  It is not that investors are stupid; it is that investors are being intentionally misled.”

But what does the have to do with the SEC’s new disclosure Form CRS?  In Rostad’s view, this is the very disclosure document that could be eliminating investor confusion about the different business models and agendas.

“If we could actually focus on plain language,” he says, “and say: this is what the business and the practices of broker-dealers are, and this is what the business and practices of investment advisors are, then I believe investors would understand it perfectly well.  There doesn’t seem to be any confusion if it is described clearly and accurately.”

Indeed, a December 2018 report by the SEC itself concluded, based on research with actual consumers, that if Form CRS used clearer language and focused on business models rather than the services that may or may not be provided, comprehension improved on the first read.  “These really are two different businesses,” says Rostad, “and the differences are not small and nuanced around the edges.  They’re at the central core.”  He notes in passing that, on its ADV, it takes Ameriprise 16 pages to answer the question: how do we get paid?  For advisors, the same disclosure rarely requires more than a sentence.

Instead of offering any information relating to business models, or how the different cohorts (wirehouse vs. fiduciary advisor) are regulated, the SEC’s mandated language is a bunch of recommended questions to ask: conversation starters, basically.  “It’s like children at the 8th grade dance,” says Rostad.  “Go up and ask Julie what she did this afternoon.”  These are questions that the brokerage industry allowed the SEC to put into its mandated ‘disclosure,’ because they knew that their brokers would be able to give prepared answers that would continue to make the investor believe they’re about to receive objective advice.  “Disclosure should not be recommending questions,” Rostad adds.  “It should focus on educating consumers as to role and purpose.”

Rostad’s Institute did its own research, looking at the CRS Forms at 29 large broker-dealers, including the wirehouses.  “One of the clearest disclosures came from, of all firms, Goldman Sachs,” he says.  “They said that their primary business is trade execution.” 

The Institute also looked at the CRS forms for 12 independent RIAs and 29 dual registrants, and Rostad found, to his dismay, that roughly half of them made no mention that they were required to act as fiduciaries.  “I’m working with a compliance attorney,” he says, “to come up with a very brief guidance for investment advisors to clarify that A) the SEC allows you to use the word ‘fiduciary’ in your CRS form, and B) here are some examples of some language that you can use to, once you state that you are a fiduciary, explain what it means in two or three sentences.”

Could one of those sentences state that a brokerage firm, broker-dealer or other sales organization will NOT, ever, use the word ‘fiduciary’ in its disclosure, and so consumers should look for that word?  “It’s a great idea,” says Rostad.

But how likely is it that the SEC staff and commissioners will amend Form CRS to include these clear disclosures, and make it easier for consumers to understand things that the wirehouses and broker-dealers very much want to keep them confused about? 

Don’t the brokerage firms have tacit veto power over all SEC initiatives?  And wouldn’t they be most likely to exercise that power over this issue, which seems to strike at the very heart of the brokerage business model?

“I think there is a reasonable basis for some optimism today that we did not have a year ago,” says Rostad.  “We have three Commissioners who look at these things differently, and we have a Chairman who, despite his Goldman Sachs pedigree, proved during his stint at the Commodity Futures Trading Commission [he led the reform of the $400 trillion swaps market] has proven that he’s willing to tell the brokerage industry, using pretty blunt language, I don’t care what you think.      I may be too optimistic,” Rostad adds, “but I really think we’re in a place where we could do things that we otherwise wouldn’t have dreamed of under previous administrations.”

Name change?

What about reforming Reg BI–or, as Rostad has referred to it, ‘Reg BS?’  Rostad says that revising the language and intent of Reg BI is potentially a 20-30 year lobbying project.  But he does plan to lobby the SEC to change the name of the regulation.  “There is absolutely no doubt whatsoever that the term ‘best interest,’ when applied to the brokerage model, is misleading,” he says.  “And everybody knows it’s misleading.”

The question in Rostad’s mind, at this juncture, is how the SEC is going to interpret ‘best interest’ when it looks at the behavior of brokers and reps (who call themselves advisors) in their interaction with consumers.  Will they still be able to recommend separate accounts that pay shelf space fees?  Will the SEC question why they’re recommending that their customers invest in something other than thrifty ETFs?  Or will brokers go back to winning sales contests?

“The SEC has acknowledged, proudly, that it hasn’t defined what ‘best interest’ actually means in the context of Reg BI,” Rostad points out.  “It has said that the firms themselves should define what it means, and develop policies and procedures congruent with what they believe it means.”

Other than changing the name of the regulation, Rostad would like to see this current SEC define ‘best interest’ clearly, and the closer this definition gets to fiduciary, the better.  “If this is what they have in mind,” he says, “why not just come out and say what we all understand to be best interest: that it is not watching out for the best interests of the company or the broker; it is putting first and foremost the best interests of the consumer.”

Is that actually going to happen?  “Let’s just say I’m concerned that this is a hill that is not going to be climbed,” Rostad admits, “because it really would disrupt the brokerage businesses the way we began to see them disrupted by the DOL Rule before it was undone by the courts.”

Putting Reg BI aside, what other initiatives is the Institute involved in?  Rostad mentions disclosure.

He very quickly offers a disclaimer about the effectiveness of disclosure in the past; whenever a regulator proposes actual rules governing reps and brokers, the industry quickly rushes to propose disclosure instead. 

To the point where, today, we have brokerage firms disclosing their fees, conflicts, underlying motives etc. in the long form.  And, of course, whenever the SEC has found that consumers are still confused or unaware, the response has been unrestrained enthusiasm.  Disclosure?  You want disclosure?  We love disclosure!  We’ll go the extra seven miles on disclosure!  Eight!  We’ll create page after page after page after page of disclosure on even the simplest concepts, and explain, and discuss, and reference—and, well, I think most readers know what happens when a very simple disclosure becomes a 50-page document, and whatever the SEC wanted the brokerage firm to communicate can be found referenced in passing on pages 18, 37 and 41.

After his admission that disclosure has been cruelly misused in the past, Rostad explains why the Institute’s new proposal is different.  “We’ve come up with a form that would break cost disclosure down to no more than two pages, with very simple tables,” he says.  “It says: here are the products we’re recommending, the amount of investment, the expense ratio and any commissions that will be earned.  The forced brevity would nullify the brokerage industry’s tendency to hide what it doesn’t want to reveal through a strategy of over-communication.  Rostad adds that there is anecdotal evidence that disclosure of fees and costs may be different from (more effective than) disclosures of conflicts of interest or who regulates whom.

Acknowledging reality

Finally, Rostad has some thoughts about the CFP Board, which has inserted the fiduciary concept into its standards of practice.  “I fear,” he says, “that it is being run more like a political party as opposed to a professional organization.”

Meaning?  “A political party is interested in gathering as many members as it can get,” says Rostad.  “A professional organization is interested in ensuring that everybody under the umbrella meets a clear set of standards.”

One doesn’t have to look far to see how the CFP Board has accommodated the brokerage firms and their reps, first by not sanctioning the thousands who claimed to be ‘fee-only’ on its website, and then not sanctioning the brokers who carelessly ‘forgot’ to disclose material regulatory actions in their CFP profiles.  (BD executives might also have been ‘high-fiving’ each other when the CFP Board announced its decision to eliminate the pesky compensation distinctions on its website altogether.) 

And… The fact that brokerage and insurance firms have periodically threatened to tell their reps to give up the CFP designation suggests that they believe that the threat to the CFP Board’s bottom line will get its attention.

Bigger picture, Rostad is troubled by the CFP Board’s ongoing marketing campaign, which either implies or outright tells the public that they can totally trust any CFP they run across to act in their best interests at all times.  That CFP advisors, all of them, represent a higher standard of behavior in the marketplace.  These, remember, are the same CFP brokers who somehow ‘forgot’ to disclose that they had customer complaints or regulatory sanctions on their records.

So what should the CFP Board do about this?

“I would feel a lot better about them if, in these marketing efforts, they would at least acknowledge that these higher standards are more an aspiration than an accomplished fact,” says Rostad.  “If they would just seriously use the word ‘aspiration’ to describe their journey toward professionalism, that would make a huge difference.  Acknowledge the reality that we’re working very hard  for it, and we’re going to get there.  Just,” he says, “tell people the truth.”

Second, Rostad would like to see the CFP Board provide fiduciary training, and case studies, and perhaps periodically administer a test that drills down on knowledge and understanding of what it means to be a fiduciary in the context of financial planning.  This initiative might help counteract the culture and training that brokers receive—to maximize their own revenues and ‘play ball’ for the firm.

Making a difference

So where does the reader fit into all this?  What would Rostad recommend that those of us far from the beltway do to drive this fiduciary and consumer protection agenda forward?

“We need RIAs to be actively involved and vocal about pushing for a fiduciary standard,” he says.  “The battleground for decades has been language,” he adds.  “Who is and is not acting in the best interests of the client, what they call themselves, the effort to minimize the distinction between brokerages and advisors—I am afraid,” Rostad continues, “that this has bled into the advisory firms themselves, that they are starting to think that the fiduciary standard is really not all that important in terms of what they do for their clients, and brokers really are kind of the same as they are.”

Is this a way of saying that the real professionals in the advisory world have grown complacent?

“Yes,” says Rostad.  “As I look across the investment advisory world, I don’t see much evidence of individuals remembering that fiduciary is a core differentiator in financial advice.  If you don’t want to engage in this fight for yourselves,” Rostad adds, “then do it for your clients and consumers.  You have people on your staff that are someday going to take over your firm.  Do it for them, for the world you want them to live in.”

At the end of our talk, Rostad says that the most important thing the profession needs, in its push for fiduciary, is individual leadership, and for individuals to realize that they, collectively, have more power and influence than they realize.

“When I accepted that wonderful award from the Committee,” he says, “I said that what we always need is ordinary people doing extraordinary things—which is how America defines heroes.  We need more heroes in the fight for a true fiduciary standard and a real profession.  I really believe,” he adds, “that we all can make a difference.”

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