The email that arrived in mid-August was an invitation from the Zero Alpha Group--a network of eight independent advisory firms in the United States and another in Australia and New Zealand--to join a conference call explaining why they were declaring 2009 "The Year of the Fiduciary" and furthermore, calling on regulators to impose "a lifetime ban on investment advisors who fail to meet their fiduciary duties" by abusing their clients' trust.
What it really was was a thinly-disguised invitation to open the financial services industry's proverbial can of worms.
All the buzzwords were there: fiduciary, fiduciary duties, trust, regulators.
And so were the questions: What is a fiduciary? Who defines fiduciary duties? And just what regulatory body would impose that lifetime ban for breaching client trust?
One of the participants in the conference call represented CEFEX, the Centre for Fiduciary Excellence based in Toronto and Sewickley, Pa. The ZAG members are among some 50 financial advisory firms--most located in the U.S.--that have been audited by CEFEX and certified as conforming to its Global Fiduciary Standard of Excellence by achieving one or all of its three certifications--Investment Advisor, Fiduciary Advisor or Recordkeeper.
Here, one name stood out from the others: Sewickley, the town in western Pennsylvania that is home to consulting firm Fiduciary360 (aka fi360), the Foundation for Fiduciary Studies and, until recently, Donald B. Trone, AIFA, co-founder of both. Just over a year ago, the former CEO relinquished his duties with fi360 to concentrate on the newly independent foundation where he continues to serve as a director and president. By separating the Foundation from the training and Web-based tools fi360 provides to clients, Trone has the opportunity to concentrate on clarifying industry best practices and, through numerous speaking engagements and publications, to promote the importance of defining fiduciary responsibility to both practitioners and the public. So Wealth Manager asked Trone: Just what is this nagging question that stalks the conference agendas at FPA, NAPFA, the CFA Institute and NASAA--not to mention the annual meetings held by the major custodial firms and mutual fund families?
Do you mean why do we have to have this, that and the other thing out there? Because the financial services industry is one of the last professions in the field NOT to have international standards. More than 15,000 standards are regulated by the International Organization of Standards (ISO) in Geneva; even light bulbs have international standards. But you take a subject like wealth management and, given the level of importance of the advice for managing a nation's wealth, what's alarming is the lack of standards to differentiate it.
WM: What about the alphabet soup of designations and certifications? You have the AIFA (Accredited Investment Fiduciary Analyst) after your name. And I noticed that your colleague, Ben Aiken, is an AIFA, a CFA, and CFP in addition to taking over as CEO of fi360.
It's a question of theory versus practice. AIFA is a designation. A designation is intended to communicate to the public that an advisor has acquired knowledge of the subject. A certification demonstrates that the advisor has applied those standards I was talking about.
WM: What is your opinion of all those designations flying around out there?
Some State Attorney Generals have started a movement to make professional designations accredited by the American National Standards Institute (ANSI). If there were a body to specify that designations meet a standard, that would probably clear out about 90 percent of them.
WM: But aren't the 'fiduciary responsibilities' of RIAs and IAs defined by the SEC?
It's in the SEC definition of an RIA, and the SEC has oversight of the profession. But with an RIA there is an automatic presumption that the advisor has fiduciary responsibility. The regulators will tell you that it's not their role to define the details of a standard of care. Their presumption is that the individuals being regulated will define the details of their decision-making process, of prudent behavior.
WM: Isn't that kind of a 'Catch 22?'
The wealth management industry is years ahead of the regulators, and we don't see a movement within the SEC to define oversight. One of the arguments FINRA (formerly NASD) proposes (for RIA regulation) is that they have more oversight and compliance requirements than the SEC.
WM: So establishing those standards is the work of the Foundation for Fiduciary Studies along with international bodies like CEFEX? But who is going to recognize you as establishing those standards?
That's where industry consensus comes in through outreach to organizations like NAPFA and FPA, to colleges and universities.
If we were starting today from scratch with the need to define the details of fiduciary responsibility, we would go to a certifying body like the ISO in Geneva, and say there is a crucial need around the world to define the role of a wealth manager. They would then convene a congress to define the standards.
The financial community went through this in the late 90s and early 2000s, but because of being international, the output was watered down. The U.S. community was embarrassed by how low a standard came out of that international body.
In 1999, when we started the Foundation, we were aware of the problems with the international approach, so we said, 'Why don't we define the standards and have them fully substantiated by law and industry consensus?' Instead, we wait for case law to see why somebody is being sued and make that into law. Or in rare cases, regulators have stated a legal requirement.
WM: It sounds like somebody put the cart before the horse.
Wealth management goes under the radar by not having a regulatory body. But the million-dollar-question is who should that body be? FINRA has more than enough to do regulating the broker/dealer community. Talk to the SEC staff about RIAs and IAs, and when you peel away the layers, they lack the understanding of the business. The Department of Labor has oversight of retirement advisors, but they're now saying that if you administer the assets in an IRA rollover, you have to be a 'qualified financial advisor.' Of course, they don't define 'qualified!'
WM: Who does that leave?
In our opinion, we would need to create a new body, a new government agency that has the unique understanding of the wealth management profession and the retirement advisor business.
WM: Meanwhile, we noticed that your current phone number bears a New London, Conn. area code, not Sewickley, Pa. Isn't that a long commute?
I recently moved to New London to become director of the U.S. Coast Guard Academy Institute for Leadership. The Academy is my alma mater. (In fact, Trone graduated as president of his class and with honors from the U.S. Naval Flight Training Program as a helicopter pilot before flying more than 100 search and rescue missions during 10 years of active duty.) The Academy has watched what I've been doing over the past 20 years. They said, 'If you can make a subject like fiduciary responsibility interesting, imagine what you could do with the subject of leadership!'
I accepted the appointment because the fiduciary standards we defined have been getting good consensus and look pretty stable, which gave me the luxury of doing this.
And actually, I discovered that the key words are the same in both areas. Take 'integrity,' for example. When a wealth manager is viewed as having integrity through the eyes of your client, then you have to be believed as a leader.
Anyway, when your alma mater asks you to return, you can't refuse--no matter what you're doing.
Nancy R. Mandell is managing editor of Wealth Manager.