In a document that reads like a preamble to a single fiduciary standard for financial advisors, Ron Rhoades, an expert on the ethics of financiial advising, has spelled out legal, intellectual, and moral imperatives for regulatory action that would change the relationship between American consumers and advisors.
Rhoades’ immediate goal is to support the Department of Labor and Employee Benefits Security Administration effort to apply ERISA’s fiduciary standard of conduct properly. However, when the history of the financial advice profession is written decades from now, this document seems likely to be recalled as a seminal work.
Rhoades, who holds a J.D. and CFP, serves as Program Director for the Financial Planning Program at Alfred State College in Alfred, New York, where he is an Associate Professor and teaches business law and advanced financial planning courses. He also owns an investment advice firm. However, in perhaps his most important role, Rhoades has become the financial advice profession’s leading ethicist.
Rhoades, in his blog, has written thoughtfully about applying a single fiduciary standard to all financial advisors. Often his posts take aim at Wall Street’s sales-oriented approach to financial advising, but’s he’s also criticized CFP Board for misleading consumers in ads about whether CFPs are obliged to act as fiduciaries always.
Rhoades’ post yesterday, entitled, “Common Sense Redux: The Legal And Economic Imperative Behind The DOL/EBSA's ‘Definition Of Fiduciary’ Re-Proposed Rule,” is a pamphlet. Taking a page from pamphleteers that since the 1500’s published on controversial issues, Rhoades makes an eloquent case for the moral imperative for applying a single fiduciary standard to all financial advisors in these three passages:
“Efforts to enhance financial literacy, while always worthwhile and important, will never transform the ordinary American into a wholly knowledgeable consumer of financial products and services,” says Rhoades. “Given the sophisticated nature of modern financial markets and complex array of investment products, it is not just the uneducated that are placed at a substantial disadvantage—it is nearly all Americans. Hence, other means are necessary to negate advantages brought on by information asymmetry.”
“Because of the vast information asymmetry, and the many behavioral biases consumers possess which deter them from effectively spending the time and effort to read and understand mandated disclosures, there exists a great need for financial and investment advice,” says Rhoades. “In such situations, our fellow citizens place trust and confidence in their personal financial advisor. It is right and just in such circumstances that broad fiduciary duties be applied to these financial intermediaries. The absence of appropriate high ethical standards for all providers of personal financial advice, whether to plan sponsors, plan participants, IRA account owners, or others, is a glaring current gap in the financial services regulatory structure.”
“Our regulators possess the authority and the ability to ensure that consumers are not misled by the use of titles and designations, and they should ensure that all those who hold themselves out as trusted advisors – or who actually provide advisory services—are bound to act in the best interests of their clients under the fiduciary standard of conduct.”