By Casey Snyder and Tom Sedoric

When Tom began his advising career as a broker and securities salesman in 1984, it didn’t take him long to see the potential for sliding scales of corruption and other such financial malfeasance. The incentives for success as a broker were not always aligned with the long-term needs of clients. Tom was not unique and in fact echoed the thoughts of most of his profession when he proclaimed, “Why wouldn’t we want to act as fiduciaries?”

In other words, why shouldn’t we act in our client’s best interests all the time?

While the term fiduciary is relatively well known, its true definition and real impact on the lives of those who depend on the good work of fiduciaries often go unnoticed. The word fiduciary stems from the Latin roots of:

  • fidere (“to trust”)
  • fiducia (“trust”)
  • fiduciarius (“holding something in trust”) Fiduciary was defined in English sometime in the 17th Century (“something inspiring trust")

Trust, as the Latin roots emphasize, is the core meaning of the word. Fiduciaries come in several varieties. They can be financial advisors (though not all are fiduciaries), talent agents, lawyers (sometimes), asset managers (under the 1940 Investment Advisor Act), trustees, and corporate board members. All fiduciaries have a legal obligation to act in the best financial interests of their clients, or in the case of board members the company they serve.

Investopedia succinctly defines it this way:

“A fiduciary must place the interest of their clients first, under a legal and ethically binding agreement. Importantly, fiduciaries are required to prevent a conflict of interest between the fiduciary and the principal.”

In theory, this seems simple enough but in practice, it can be as complicated as human behavior itself. It was less-than-stellar human behavior that led to the federal regulatory foundation we have today with the passage of the Investment Advisors Act of 1940 and Investment Companies Act of 1940. Both laws emerged as the Great Depression was unfolding. Many of the consumer protection provisions included grew out of research that found the mutual fund industry, in particular, was populated by too many ‘advisors’ and companies making millions by promoting “hot tip” schemes -- and selling clients preferred securities without disclosing any conflict-of-interest scenarios. It was all quite legal but not necessarily moral.

The 1940’s Acts designated the Securities and Exchange Commission (the SEC itself was created in the wake of the 1929 Wall Street crash) to be the overseer. But from the beginning the ‘rules’ created (with strong input from the securities industry) were much more pliable than many in Congress likely wanted. In the wake of the subprime financial sector collapse in 2008, the Dodd-Frank Wall Street Reform & Consumer Protection Act in 2010 was intended to strengthen and enhance the original ’40 Acts. It remains to be seen how effective these reforms will be as Dodd Frank is a voluminous and bulky piece of legislation.

Early in his career, Tom played an “unrequired” fiduciary role in a high-stakes situation involving a major stakeholder in a local public company amidst a hostile takeover bid. It turned out well for his client and, equally important, for the long-term health of the company which still exists as a public company today. As they say, Tom had no dog in the fight, but he helped his client carefully assess the situation, putting his client’s best interests first.

Having the credentials of a fiduciary does not automatically confer virtue or even legality. Sadly, there is an endless parade of fiduciaries like lawyers, agents, or financial advisors who have broken the law shattering the trust and often the lives of their clients. With unparalleled cynicism, in the final two years before his vast criminal Ponzi scheme unraveled, Bernie Madoff was a fiduciary - a Registered Investment Advisor. For the previous 46 years, Madoff was a registered representative and CEO of a broker dealer, a designation with laxer ethical and legal parameters. Among many sins, Madoff also made a mockery of the system because he was, at the time of his arrest, the vice chairman and on the board of governors of the National Association of Securities Dealers (NASD), the self-regulatory body overseeing NASDAQ and other over-the-counter trading. A perfect example of the fox overseeing a hen house full of conflicts of interest.

We find it is much easier morally, ethically, and financially to be proud fiduciaries. We do not have to obviate the truth (or lie) about what we are doing on behalf of our clients. We are passionate about our obligation to clients and must remain unbiased in our counsel to them

A good fiduciary should be transparent on how they are compensated, how their fee structure is established, their specific roles and responsibilities, and should follow guidelines to avoid, minimize, and disclose conflicts of interest at all costs.

 

 

 

 

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