Is Famed Fiduciary Advocate Ron Rhoades Ready to Concede Defeat?
For years, Ron Rhoades has traveled the country-side, lobbied government regulators and, in general been a de facto spokesman for the adoption of a universal fiduciary standard. He’s written papers, published blogs and led panel discussions at conferences from sea to shining sea. He’s been the Shining City on the Hill, a bright beacon by which the righteous and pure could confidently steer their corporate vessels. And his consistent message of Fiduciary Duty proved no mere rhetorical device, for he once fell on his own sword for its sake.
So it was with great surprise when, speaking before a packed audience at the monthly FPA chapter meeting in Rochester, New York, a “Flash!!!” blazed across the PowerPoint slide and Rhoades admitted, “As a pro-fiduciary advocate, I am (nearly) ready to concede defeat.” He then offered these predictions to the stunned audience: The DOL’s new Fiduciary Rule will not apply to IRAs and the SEC will offer a “New Federal Fiduciary Standard.” This new standard would include the same suitability standard as currently practiced by non-fiduciaries but with “casual disclosure” requirements added on. In Rhoades words, this would be a “FINO” – a “Fiduciary In Name Only.”
How did we get to this point on where we go from here? Rhoades, who serves as Program Director of the Financial Planning Program at Alfred State College, offered his insights on the winners and losers, challenges and opportunities wrought from “The Fiduciary Wars.”
First, he described the two sides in this long battle – the suitability standard vs. the fiduciary standard. He likened the former to an “arms-length relationship” whereby the salesperson or distributor placed themselves between the product manufacturer and the customer. Although this is a classic “caveat emptor” situation, the sales folks do have several obligations, including not to lie, cheat or steal, as not to misrepresent the product; not to affirmatively disclose (unless imposed by statute or regulation); and, to only offer what is “suitable” to the client (i.e., the products don’t have to be the best).
The fiduciary standard, on the other hand, places an adviser in between the client and the product suppliers. It’s built on a relationship of trust. The elements of trust include: 1) being an expert; 2) due care; 3) acting in the best interests of the client; 4) loyalty; 5) complete honesty and candor; and 6) acting in utmost good faith.
This battle centers around one behavioral focal point – how does the adviser act when a conflict of interest is present. Fiduciary advisers immediately and affirmatively disclose material facts; they then ensure client understanding by obtaining informed consent; and, they continue to act in the best interests of the client.
Rhoades emphasized this last bit. He repeated “disclosure does not negate continuing fiduciary duty to act in the best interests” of the client. He added “it is fundamental that a client will not consent to be harmed.”
How has the SEC responded on this battlefield? They, as well as Congress, talk the talk but don’t walk the walk, according to Rhoades. He pointed out the “SEC said… Let’s raise ‘the standards of those on the edge to the level of the standards of the best.’” He also told the group a senator once said “Let this new organization promote ‘truly professional standards of character and competence.’” Despite this lofty prose, the SEC today will neither apply nor enforce the fiduciary standard already on the books. Rhoades explained that, “despite limits on estoppel and waiver in fiduciary law… [the] SEC permits firms to: negotiate to not be a fiduciary; and, disclaim core fiduciary obligations.
Although he admits he’s nearly ready to concede defeat, the defeat of which Rhoades speaks may be likened to more of a single battle than the entire war. He implies the battle to win the hearts and minds of the regulators and politicians appears to have been won by the deep pocketed industry lobbyists. The real way, however, isn’t in Washington or on Wall Street, it’s on Main Street. To that end, Rhoades has developed a concept he calls the “Bona-Fide Fiduciary” (or “BFF” for those young hipsters out there). He says “BFF’s will distinguish themselves via the Consumer Checklist.” He could foresee a day when a public service campaign tells investors to “Ask your adviser these questions and get the answers in writing.”
Already, Rhoades sees BFFs making inroads. While an industry sponsored study claims billions of dollars in retirement assets will leave brokers if the DOL’s proposed Fiduciary Rule were to include IRA, Rhoades says what the industry doesn’t tell you is that it’s really a migration already taking place. He cites Cerulli research which shows, from 2011 to 2014, the wirehouse market share in IRA Rollovers has fallen from 41% to 34% while the Fee-Only RIA (i.e., fiduciary) market share has risen from 12% to 14%.
Rhoades ended this portion of his talk with a statement that “expert financial and investment advisers deserve professional compensation.” He noted that, while adviser fees have dropped by two-thirds since 2000, an overemphasis on fees is giving clients the wrong impression that investment advice is a commodity. Products are a commodity. Service it not. And he told an old story to prove this point.
“One day,” began Rhoades, “a lady walking in Paris happened to see Picasso sketching the Eiffel Tower. ‘Mr. Picasso,’ she asked, ‘can you paint my picture?’ The old master replied, ‘Why, yes!’ and in five minutes drew an impressive Picasso-esque portrait of the woman. When asked by the woman how much she owed him, he said, ‘Fifty Thousand Francs.’ ‘Fifty Thousand Francs!’ screeched the woman, ‘but it only took five minutes to draw.’ Without losing a beat, Picasso snapped back, ‘Madam, you have only seen the final five minutes of this portrait’s creation, but, I assure you, it took me a lifetime to create it.’”
Low fees, it turns out, are no substitute for veteran experience.