The meaning of “fiduciary”, or why others looking out for you is controversial

Stack of papers

A “fiduciary” is a person or organization that is required to act in the best interest of another.

I believe that everyone should be required to act in this way. If I’m going to work with anyone or anything in the financial services industry, I’m not going to do it unless I have assurances that this person or organization is acting in a fiduciary capacity. Wouldn’t you?

Mandating this seems uncontroversial to me.

And yet, it’s apparently very controversial.

A little history

After the Great Recession of 2007-2009, the U.S. passed the Dodd–Frank Wall Street Reform and Consumer Protection Act as a means to “promote the financial stability of the United States by improving accountability and transparency in the financial system” and “to protect consumers from abusive financial services practices“, among much else.

You can read the full bill here. Actually don’t, because like all designs-by-committee, it’s too long, full of hand-waving and compromises, and is generally inscrutable, even for legalese.

But just because a bill is long and hard to follow doesn’t mean it’s worthless. And Dodd-Frank does some fairly common-sense work; you just have to dig for it.

Take Section 913 (Section 913 (g) (1) if you’re really curious). This section amends previous laws to establish “a standard of conduct (fiduciary duty) for brokers, dealers, and investment advisers, without regard to their financial or other interests, to act in the customer’s best interest when providing a retail customer with personalized investment advice about securities.

Let’s take a step back here. This is stating that financial services providers now have a “fiduciary duty” to act in a customer’s best interest.

Which makes me wonder: what exactly were they doing before then?

Perhaps I’m reading too much into this, but it sounds like there was previously a license to screw people over.

The acts that this amended dated back to the Great Depression (Securities Exchange Act of 1934 and Investment Advisers Act of 1940), so this is reaching back pretty far. Did we really need to wait almost a century for someone to get around to mandating that someone act in a customer’s best interest?

Yearning to be free (to give poor choices)

Luckily, none of this is controversial.

Oh wait.

It turns out that the current administration has a vested interest in not only dismantling the entire Dodd-Frank Act (a more complex topic, one that I’ll avoid for now), but also appears to be specifically interested in removing the fiduciary duty clause as well.

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In 2016, the U.S. Labor Department put forth standards for how brokers are allowed to offer advice to clients, and what kind of advice they need to offer. This was set to go into effect this year.

And there is a push to delay or dismantle the enactment of these rules.

Why? Because it “limits consumer choice.”

So, requiring advice that’s in the best interest of clients is limiting? Limiting to whom?

Right now, you’ve got one kind of advice: good advice. But we don’t want to limit choice, so we want you to have two kinds of advice: good advice and bad advice!

Watch this space

Events are unfolding, and I don’t know what’s going to happen here.

In one way, I’m not exactly sure how much it matters. Since the rules were put in place in 2016, and have not been put in effect yet, I think it follows that we’ve been continuing to live in a regulation-less environment, where anyone is free to give advice that screws you.

(Unless I’m reading the bill wrong, in which case please comment below and let me know.)

And because you have this “choice”, the onus is on you to make a good choice, meaning to only work with people or organizations that guarantee to act in a fiduciary capacity. Ask questions. Make sure. Don’t make any moves until you understand what you’re doing.

Regulation is not a four-letter word

It would be nice if we had suitable regulations in place to guide people into making better choices. That, to me, is the point of regulations.

Alas, too many people these days see “regulations” to mean “I can’t do what I want”. Which is actually true. Otherwise, we play one large game of “tragedy of the commons“.

So I’m sorry, but “I wanna” isn’t a compelling enough reason. If you want to screw people over, is that something we really want to allow?

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