Is ‘Fiduciary’ Losing its Luster?

Is ‘Fiduciary’ Losing its Luster?

July 25, 2023

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Is ‘Fiduciary’ Losing its Luster?
by Christopher Carosa July 25, 2023 starts each week with a trending topics post released just before the start of the work week. This post links to major fiduciary stories reported by various media outlets during the previous week. Its introductory paragraph ends with the warning “When everybody’s a fiduciary… no one is.”

Have we reached that point?

There’s no question that financial service providers positioning themselves as a “fiduciary” is the right move. Not only is it politically correct in that the DOL has been pushing the industry in this direction, but it is also the right thing to do.

“I believe the reason that so many financial providers have adopted the fiduciary model is the concern among clients and potential clients of the potential fiduciary liability of a plan sponsor, a concern that has probably been enhanced by the number of ERISA lawsuits challenging plan investments of all types,” says Marcia Wagner of The Wagner Law Group in Boston, Massachusetts. “By agreeing to be a fiduciary as an investment adviser, offered the relevant plan fiduciaries at least a limited amount of cover, in the sense that appointing a 3(21) investment adviser to assist the relevant plan fiduciary in making investment decisions is evidence of prudent process.”

Ron Surz, co-host of the Baby Boomer Investing Show and president of Target Date Solutions in San Clemente, California, offers a blunter assessment. “You need to say you’re a fiduciary to get the business,” he says. “That does increase your liability, but you take that chance. Most ‘fiduciaries’ wrap their arms around procedural prudence rather than substantive prudence, so innovations that do what’s right are rarely considered. The view is that procedural prudence is fiduciary insurance, but that’s wrong. The best fiduciary insurance is protecting beneficiaries. Excessive fees were procedurally prudent, until lawsuits changed that.”

As the retirement plan industry has evolved, being a fiduciary is no longer a choice, it is a requirement.

“It is necessary to be competitive,” says Andy Larson, Director of Retirement Education at Retirement Learning Center in Brainerd, Minnesota. “The perception of quality, prestige and expertise surround the fiduciary role.”

It’s as though the DOL initiatives escaped from the compliance department and found their way into the marketing meeting. Not that that was a bad thing. Compliance only does what the regulators demand. It’s the marketing department’s job to give the clients what they want, and that’s usually (but not always) a good thing.

“Many financial providers adopted the fiduciary business model as a result of the Department of Labor’s efforts to expand the definition of investment advice fiduciary that had been in effect since 1975 under ERISA and the anticipated impact this would have on the retirement plan industry,” says Michelle Capezza, Of Counsel at Mintz in New York City. “Even though the Department of Labor rules continue to evolve, many advisors determined that it makes business sense for financial advisors to acknowledge up front that they are a fiduciary acting in the best interest of the client, adhering to a duty of loyalty, charging no more than reasonable compensation, and providing full disclosure of conflicts of interest so the client can make an informed decision whether to proceed with a transaction. This provides greater assurance to a client than the non-fiduciary model that follows a suitability standard whereby the recommended investments only have to be suitable, and not necessarily consistent, with the client’s objectives and profile.”

But has the near-universal acceptance of “fiduciary” really helped, or has it merely confused things?

“Because if everyone is a fiduciary, it is simply expected that you will be one,” says Lawrence (Larry) Starr, Vice President at Cornerstone Retirement, Inc./Qualified Plan Consultants in West Springfield, Massachusetts. “It’s a competitive disadvantage if you aren’t, but not a competitive advantage if you are; it’s just something you need to do now.”

Of course, it remains true that “fiduciary” comes in many flavors. Which one is the right one for each client is a matter of interpretation.

Mark S. Nicholas, founder of Transform Retirement in Green Bay, Wisconsin, says, “Being a fiduciary itself no longer represents a competitive advantage; it’s table stakes. The scope of fiduciary services; however, still matters. Everyone wants a fiduciary provider holding to ERISA’s high standards, but it’s critical that plan sponsors know how to differentiate fiduciary services, which is often highly nuanced and requires expert knowledge.”

This isn’t as good as it sounds. The constant redefining of the term “fiduciary” has left those seeking shortcuts around the spirit of the rule plenty of latitude to interpret things in their best interests, not necessarily in the customer’s best interests.

Compounding matters is the confusion among those very same customers, who often think they’re getting something when they’re not. This is where the marketing department can turn to the Dark Side.

“Once upon a time in the mystical land of Financeville, being a fiduciary was like possessing a magic wand that guaranteed trust, respect, and an army of loyal clients,” says Terrence Morgan, President of Ok401k, Inc. in Oklahoma City, Oklahoma. “Fiduciaries were the ‘knights in shining armor,’ sworn to put their client’s interests above their own. Well, in 2012 the King of the Land issued an edict called 408(b)(2) that all the commoners must receive from an advisor selling a 401k plan. The ‘Dark Knights’ frightened by this oppressive Edict started to cunningly disguise themselves as fiduciaries and confuse the peasants of the land. They had a plan. They wore capes of charisma, wielding fancy brochures, thick 408(b)(2) Service agreements that no one could understand. These ‘Dark Knights’ promised riches beyond imagination. Little did the unsuspecting commoners know that these ‘Dark Knights’ capes were merely smoke and mirrors, concealing hidden fees and conflicted interests. Soon everyone had a magic cape.”

In a sense, we’re no better off than where we were when this whole fiduciary craze started in earnest so many years ago. In fact, we may be in a worse situation. Back then, at least, we knew who wore the white hats and who whore the black hats. Today, thanks to muddled and often conflicting regulations for multiple agencies, everyone is wearing fifty shades of gray.

“Albeit cynically, I believe the big wirehouses and the advisors therein are or will be slow to change their culture,” says Richard Bavetz, investment advisor at Carington Financial in Westlake Village California. “Moreover, REG BI didn’t really go far enough to eliminate Dual Agency so there are advisors claiming to be fiduciaries who are still beholden to their respective Broker-Dealers and unable to truly ‘serve two masters.’ Therefore, speaking for the pure fiduciary, there is still a competitive advantage in my view as long as they can practice with distinction and get the message out that they represent the new experience most folks have been craving.”

When everyone is a fiduciary, nobody is a fiduciary. And that might be exactly where we are right now.

Christopher Carosa is an award-winning online news producer and journalist. A dynamic speaker, he’s the author of 401(k) Fiduciary Solutions, Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort, From Cradle to Retirement: The Child IRA, and several other books.