Fiduciary duty is necessary, but not sufficient

As you are no doubt aware, there is an ongoing debate in the US on the necessity for introducing a fiduciary standard of care for all those claiming to provide financial advice to retail clients. Specifically the SEC and Congress are considering extending the fiduciary requirement, now applicable to only Registered Investment Advisors (RIAs) to brokers and insurance agents, who many feel are salesmen masquerading as “advisors”. Requirement of fiduciary obligation is a necessary, not sufficient, condition for superior outcomes for investors. This blog is triggered by a couple of articles in the past few days pertaining to lawyers who, as far as I understand, already have a fiduciary obligation to their clients.

First is the  fascinating and insightful comments by Ontario Chief Justice Winkler on the legal “profession” quoted in Bert Hill’s Ottawa Citizen article “Chief Justice Winkler vs. the Nortel quagmire” “The environment in which many lawyers currently practice has, over time, become increasingly competitive and commercial. There is a pressure to bring in, and to keep, clients. The drive to the bottom line is difficult to resist. But I reiterate: Law is, first and foremost, a profession; it is a business only secondarily. If you fail to recognize this distinction, you will almost certainly lose your way.”  “At another legal conference, Winkler recalled that lawyers did not keep dockets when he was practising law. The amount of time spent on a case “was determined entirely on what the case called for, and how thoroughly you wanted to be prepared,” he said. “It had nothing to do with how much you could charge.”

The other is the WSJ’s  “Law firms split over nonlawyer investors” Jennifer Smith writes “The legal profession’s notion that law isn’t a commercial enterprise may come as a surprise, since some lawyers now charge more than $1,000 an hour. But some legal purists are aghast at a proposal that would reverse long-standing tradition by letting nonlawyers own limited stakes in U.S. law firms…(which) could push law firms to maximize profits at the expense of their obligations to clients.” (Not clear why law firms might be interested in bringing on investors from outside of the legal profession, other than increasing the contingency based legal work.)

 It seems that some “professionals” need help to overcome the challenges associated with doing the right thing. So having a fiduciary responsibility might be a necessary but not sufficient condition to a conflict-free interaction with a professional; experiencing a fiduciary interaction/transaction will ultimately be also determined by the character/integrity of the professional. I have no doubt that many lawyers still operate as Justice Winkler did:  “The amount of time spent on a case “was determined entirely on what the case called for, and how thoroughly you wanted to be prepared…It had nothing to do with how much you could charge.” Still the fiduciary model is not working perfectly.

In the financial ‘advice’ business (or profession) the stakes are even higher (not everybody goes to a lawyer, but everybody must save for their retirement and must interact with the financial industry) and in some ways the complexity is greater (e.g. pension plan administrators who are also often the employer/sponsor hire lawyers, accountants, actuaries, investment managers who have fiduciary or professional responsibilities to the administrator leave the employee and/or pension plan beneficiary exposed to aggressive practices for the employer/administrator’s benefit).

In order to protect those most in need of protection, the laws must be changed: not only requiring fiduciary behaviour when claiming an advisory capacity and explicitly state to whom that fiduciary duty is owed to, but also to create a system that is conducive to fiduciary behaviour (e.g. minimizing temptations, like sponsor/employer must not be same as administrator of pension plan), and when all else fails laws must enforce the rights of the vulnerable pension plan beneficiaries and retail investors (e.g. modify BIA/CCAA bankruptcy law to raise the priority of underfunded pension plans).  While you might be able to minimize your interaction with lawyers, you’ll have a hard time to avoid financial industry and its “advisors”. Let’s make sure that they understand they duties and responsibilities.

P.S. You might also be interested in reading about the new study on cost penalties claimed by the brokerage industry if fiduciary standards were to replace suitability standards “Fiduciary standard doesn’t raise costs”; there are none!



  1. Speaking from the USA I am quite distressed by the non-fiduciary compliant fees ( .60 for a 500 Index fund in among a menu of largely actively managed funds) in my husbands small business 401-K. The irony is , of course, that the RR they hired who takes .25 revenue sharing to “advise” and theoretically fulfill fiduciary obligation to employees is himself the problem – eg he wants his share and so does the plan sponsor (ING). It is AWFUL and we are TRAPPED. I manage my entire portfolio for 30 bp and yet my spouse is forced into this over-priced without choices yeilding full diversification.

    IMO its criminal. In the age of lower equity premiums and QE II every dime counts.

    The system is rigged here and the financial firms that can make money on poor stuck-in-plan clients are colluding in non-fiduciary behavior. I am harassing ING to post fees and improve their web site but they are too busy sucking our blood to share with us the costs we are paying.

  2. I am afraid, I haven’t come across before these “non-fiduciary compliant fees”…you are absolutely right in agonizing of the corrosive effect of investment costs 30bp is pretty good for a balanced portfolio including foreign equities…the one thought which occurs to me that you may wish to explore, is Vanguards small business 401(k)s ( ) if this is applicable to you…
    All the best…Peter

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