The financial services industry needs a professional standard, particularly one that is regulatory agnostic so that we’re no longer subject to the vagaries of politicians and regulators.
When talking about professional standards, there’s a quote that I often turn to:
“Society depends upon professionals to provide reliable fixed standards in situations where the facts are murky or the temptations too strong. Their principal contribution is an ability to bring sound judgment to bear on these situations. They represent the best a particular community can muster in response to new challenges.”
– Dr. Robert Kennedy, St. Thomas University
The problem we face today is that fiduciary best practices developed for the purpose of defining a professional standard have been corrupted by politics, power, ego, and greed. ‘Fiduciary’ has become its own ‘murky temptation’ and as a result we no longer have reliable fixed standards.
All professions share four elements in common:
- Formal education and training requirements that exceed de-minimus licensing requirements.
- Defined core values (conversely recourse for unacceptable behaviors).
- Defined best practices and a supporting decision-making framework.
- A recognized governing body.
Sadly, our industry does not meet any of these requisites. In fact, regulatory rulemaking is making it even more difficult for the public to distinguish the real professionals in our industry.
Soon everyone will be a fiduciary…and yet, they won’t.
If ‘fiduciary’ is no longer the suitable cornerstone for defining our profession, what is the alternative?
Neuroscience suggests that when certain neurological capabilities and leadership and stewardship behaviors are exhibited, the quality of decision-making outcomes is dramatically improved. When these innate traits and behaviors are integrated with a prudent decision-making framework the results far exceed typical fiduciary outcomes.
This integrated approach is called behavioral governance which is intentionally designed to be the follow-on to behavioral finance, except now the focus is on key decision-makers instead of individual investors or participants.
There are several advantages to behavioral governance:
- It can be adopted and used by any professional associated with the financial services industry—advisor, broker, financial planner, asset manager, insurance professional, or recordkeeper.
- The framework is universal so it can be adopted by any key decision-maker, no matter the industry. This is a huge advantage over a fiduciary standard which is only applied when the decision-maker is serving in a fiduciary capacity. Most fiduciary assets are being managed by men and women who are not financial services professionals. These ‘lay-fiduciaries’ would be better served by teaching a framework they can use every day—to lead a team, department, division, C-suite, board, or committee—as opposed to a fiduciary framework they may only use once a quarter.
- The framework is simple and in plain English—it does not include regulatory language, legalese, or industry jargon. Neuroscience also informs us that complexity often is an inhibitor to the formation of trust.
Herein is another reason why behavioral governance is a superior alternative to fiduciary—it’s more effective than fiduciary in building trust.
To illustrate, let’s examine the role of the typical retirement advisor. At the risk of oversimplifying, retirement advisors seem to be focused on either serving plan participants or plan sponsors.
Those focusing on plan participants take a bottom-up approach. They’ve realized that enrollment kits and participation education programs are not sufficient in preparing workers for retirement. The response has been the creation and adoption of financial wellness programs and behavioral finance techniques, such as auto enrollment and auto escalation.
Unfortunately, these programs have yet to reach their full potential: the primary reason…the lack of trust between the plan sponsor and participants. For more than 15 years sociologists have reported that most workers don’t trust the company they work for…and if they don’t trust the company, they’re not going to trust the company’s benefits.
Consider the following: poor leadership and stewardship on the part of an employer often results in…
- Higher employee turnover which frequently leads to the withdrawal of plan assets and leakage (plan assets are not reinvested in another qualified plan or IRA).
- Higher health care costs and absenteeism because of stress.
- Lower productivity and profitability, which results in fewer opportunities for profit sharing or employer matches.
Those focusing on plan sponsors are taking a top-down approach. They’ve realized that traditional fiduciary training programs have not been effective in engaging plan sponsors, which results in:
- No one taking ownership of the plan participant experience (of financial wellness programs).
- Misplaced expectations that if a benefit is offered, employees will fully participate.
- A pervasive attitude that ‘good enough’ is ‘enough.’
To extract the greatest benefit from financial wellness and behavioral finance programs, we need to focus on building trust which can only be achieved by aligning the bottom-up and top-down approaches.
In short, what every profession has in common is a framework for integrating core values and behaviors with a governance process in order to build trust and improve decision-making outcomes.
Fiduciary best practices developed over the last 35 years were intended to define a professional standard. Unfortunately, self-serving interests have destroyed the original objectives of the fiduciary movement.
Instead of ‘fiduciary’ being the cornerstone of our profession, it’s clear that a framework that integrates leadership, stewardship, and governance is the superior alternative. We will still need to comply with fiduciary standards, but it will be our role as leaders and stewards that will dramatically improve decision-making outcomes.
The public ‘gets’ the role of a leader and steward…the public will always struggle with understanding the value of a fiduciary.
SEE ALSO:
• New Fiduciary Best Practices for Insurance and Annuities: CBCF
Don Trone is regarded as the ‘Father of Fiduciary’. He is the CEO and co-founder of 3ethos and the CEO and one of the co-founders of the Center for Board Certified Fiduciaries which is affiliated with the Wake Forest University School of Professional Studies. CBCF is the only organization offering graduate-level training in the leadership and stewardship roles of fiduciaries.
