Peter Drucker famously said, “What gets measured, gets managed.”
In the 401k industry, it might be more appropriate to say, “What matters is what needs to be measured.”
One of the many problems with the fiduciary standards proposed by the DOL and SEC is that they do not understand the value of a fiduciary. They do not understand what matters as evident by their singular focus on complex and lengthy disclosures.
What the regulators and their proponents are missing is that a fiduciary’s capacity to manage a procedurally prudent investment process is what really matters. Disclosures are part of that process, but disclosures should not be the sole determinant in measuring the value of a fiduciary.
It also should be noted that both the DOL and SEC have proposed a best interest standard. In contrast, what matters is a procedural prudence standard, which defines a much higher standard of care.
Both standards require a fiduciary to demonstrate that they’re acting in the best interest of a client.
However, a procedural prudence standard has the additional requirements that a fiduciary demonstrate that their decision-making process is inclusive of fiduciary best practices and generally-accepted investment management principles.
If you’ve read MoneyBall or seen the movie adaptation, you might be familiar with “SaberMetrics,” or the use of evidence-based analysis to measure the value of a baseball player.
Baseball traditionalists focus primarily on a player’s batting average. With SaberMetrics, the emphasis is on a player’s ability to get on base and score runs. The difference between the two approaches is that a batting average does not reflect the number of times a player has walked or been hit by a pitch.
Therefore, a batting average is not always the best metric for calculating a player’s ability to score runs. Since games are won by out-scoring an opponent, there are those who argue that SaberMetrics is the better way to measure what matters.
Drawing a parallel, we would like to introduce the term “FiduciaryMetrics,” which is the use of evidence-based analysis to measure the value of a fiduciary.
The process of measuring the value of a fiduciary—FiduciaryMetrics—requires that we first define a uniform fiduciary decision-making framework. This is something neither regulator has done, which is one of the reasons why there is so much confusion and why we continue to argue their proposals cause more harm than good.
As an aside, we have a similar criticism of the CFP Board. The board is subjecting CFP certificants to a fiduciary standard—the details, of which, have never been defined. There were industry efforts to define a fiduciary framework specifically for financial planners, but the CFP Board deliberately interfered.
The framework we would suggest for FiduciaryMetrics is the same process we’re using to model Behavioral Governance. This is a new body of research that examines the interrelationships between leadership, stewardship and governance (fiduciary).
The FiduciaryMetrics framework depicted in the steps below defines in 56 words a procedurally prudent decision-making process. In contrast, each regulator has used more than 1,000 pages to define a lessor best interest standard.
Consistent with a procedural prudence standard, the framework is fully substantiated by fiduciary best practices, generally accepted investment principles, financial planning standards and FINRA rules.
The framework is truly uniform. It can be used to define a fiduciary standard for retirement advisors, wealth managers and financial planners.
In addition, the framework can be used to define a fiduciary process for lay-fiduciaries. These are the more than 8 million men and women who manage the assets of foundations, endowments, personal trusts and retirement plans. What matters is that the financial services industry needs to know how to support these lay-fiduciary decision-makers.
FiduciaryMetrics Framework
Step 1. Analyze—Define roles and responsibilities, state goals and objectives
Step 2. Strategize (RATE)—Identify risks and assets, identify time horizons and expected outcomes
Step 3. Formalize—Define the strategy, communicate the strategy
Step 4. Implement—Implement the strategy, formalize financial controls and procedures
Step 5. Monitor—Monitor the strategy, scrutinize for conflicts and self-dealing
What follows is a FiduciaryMetrics Checklist that can be used to measure the value of a fiduciary. When we put the proposed DOL and SEC standards alongside the framework, we also can readily identify what a particular regulatory standard has failed to measure.
FiduciaryMetrics Checklist
| Is there a procedurally prudent process for…? | DOL | SEC |
| Identifying key decision-makers and their roles and responsibilities
| Yes | Yes |
| Capturing a client’s goals and objectives
| No | No |
| Determining the level and sources of a client’s risks
| No | No |
| Determining the level and sources of a client’s assets
| No | No |
| Determining the time horizon for a client’s goals and objectives
| No | No |
| Determining the expected outcomes, or short-term objectives, that need to be reached in order to meet a client’s long-term goals and objectives
| No | No |
| Determining a client’s investment strategy (asset mix) that takes into account a client’s risks, assets, time horizons, and expected outcomes
| No | No |
| Communicating the strategy to a client
| No | No |
| Selecting prudent experts to implement a client’s strategy
| No | No |
| Controlling and accounting for the fees and expenses associated with a client’s strategy
| Yes | Yes |
| Periodically monitoring a client’s strategy to assess how well the client is progressing towards meeting their goals and objectives
| No | No |
| Scrutinizing for conflicts and self-dealing
| Yes | Yes |
The above demonstrates that each of the regulators has come up short in defining a framework for measuring the value of a fiduciary. In terms of measuring what matters, the two regulatory standards are indistinguishable—they’re equally bad.
A favorite scene from MoneyBall involves Oakland A’s general manager Billy Beane (played by Brad Pitt). He informs team scouts he will apply SaberMetrics to select players:
[Billy Beane] The problem we’re trying to solve is that there are rich teams and there are poor teams. Then there’s fifty feet of crap, and then there’s us. It’s an unfair game. And now we’ve been gutted.To paraphrase, the problem the financial services industry is trying to solve is that there’s a procedural prudence standard, and there’s a lessor best interest standard. Then there’s fifty feet of crap, and then there’s the fiduciary standards being proposed by the DOL and SEC. It’s an unfair game. And now we’ve been gutted.
What really matters is a fiduciary’s capacity to manage a procedurally prudent process. Regulations, if they are to serve any useful purpose, need to measure what really matters.