Like thousands of Americans, I’ll confess to a certain morbid fascination with made-for-TV crime dramas including CSI, Law & Order, Cold Case, and even occasionally the more gruesome Criminal Minds. Most captivating are the stories where seemingly small defects in the moral compass lead to a cascading series of unintended (but not unpredictable) consequences. When the usual suspects are rounded up, invariably investigators find the facts extracted from crime scene evidence are in conflict with statements made by those with something to hide…or more specifically, by those with something to gain.
Every professional advisor has the ethical responsibility to prioritize their client’s needs first. Yet all too frequently our preliminary exam of account statements that precedes each new engagement reveals a series of telltale fingerprints pointing suspiciously towards something other than a single-minded focus on achieving client financial planning objectives. In some instances, the mishmash of proprietary mutual funds, separately managed accounts, underwritten securities, and engineered financial products renders understanding of the overarching client planning objectives all but impossible. In other cases, the vague outline of a once viable plan might still be perceptible, but time and inattention have long since caused any forward progress to careen off the rails. While either extreme may not technically be a crime, the debilitating results are similarly consequential.
Somewhere along the way, it seems the unwavering fiduciary standard of loyalty to client above all else has given way to the diluted notion of “suitability” for a substantial portion of financial service practitioners. The problem is that suitability is a standard of care you just don’t go advertising. It’s kind of like bragging that you graduated in the top 90% of your class. Unfortunately, the alphabet soup of credentials, titles, and regulatory bodies used these days offer little if any clue to which side of the fiduciary divide an advisor falls.
Want to know how to tell the difference? Ask. Advisors that adhere to a binding fiduciary standard of care generally can’t wait to tell you. Everyone else is hoping the subject never comes up.
Why? Not surprisingly the diluted standard of suitability is generally tilted against investors and provides sufficient cover to shield brokers and any number of other “financial consultants” whenever disputes arise. This is especially true when the typical arbitration panel is stacked with folks having strong ties to the brokerage industry.
Does partnering with a fiduciary provide investors with any guaranty of ethical behavior or superior investment results? Absolutely not. Investors should always investigate their advisor’s regulatory complaint file as well as the record of their advisor’s employing firm. But knowing up front what standard of care your advisor is legally bound to uphold is a really good start.
How strongly do I feel about upholding the fiduciary standard of care? Plenty. So much in fact that an entire page of our client service agreement is dedicated to putting our fiduciary obligations in writing. No wavering, no hedging, no excuses.
I won’t just leave my fingerprints on the highest standard of care the industry has to offer, I’ll put my permanent address on it and sign my name. I wonder how many others are willing to sign the same confession.
Michael Reid, CFA is a Managing Director and Partner at Exchange Capital Management. The opinions expressed in this article are his own.
