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Creating Confusion through Fiduciary Status
By Louis S. Harvey, CEO Dalbar, Inc. on Oct 23, 2012


Well? Are you a fiduciary or not!
While this appears to be a straightforward question that can be answered with a “yes” or “no”, covered service providers have engaged in childish games that take obfuscation to unprecedented levels with their answers.
The first childish game is the “silent treatment”. The “silent treatment” is to say nothing, on the basis that the regulation requires that the covered service provider state that it is acting as a fiduciary. The regulation does not explicitly say that the covered service provider must say that it is NOT acting as a fiduciary. The childish interpretation is therefore to say nothing and let the responsible plan fiduciary guess whether the answer is somewhere else in the documentation or if the answer is “no”.
The second childish game is “send the fool a little further”. In this game, the covered service provider refers the responsible plan fiduciary to another document which may refer to yet another and so on to find the answer. In this game the seeker of the answer will often abandon the search, but those that dare to demand an answer are shown that it does exist in a footnote in the back pages of a referenced document.
The third childish game is “baffle them”. The covered service provider playing this game makes conditional statements in which the reader is unfamiliar with the conditions. In essence the reader is told something like, “If we advise you on how to invest, we are not a fiduciary” (Investment Policy Statement). If we advise you about what to invest in, we are acting as a fiduciary.” Another example of the “baffle them” game is declaring that “If you use our Super Service, we are not a fiduciary. If you use our Super Duper Service then we are acting as a fiduciary.”
You might think these childish games were imagined, but you would be wrong. They are present in MOST of the disclosures that we have reviewed since July 1, 2012!
The childish games are even more ridiculous when contrasted with the core principle of how a fiduciary is expected to act, the prudent person rule:
“Act in the interests of clients with care, skill, prudence and diligence under the prevailing circumstances that a prudent expert acting in a like capacity and familiar with such matters would act.”
While the “silent treatment” defeats the purpose of the regulation one can see the reason why non-fiduciaries would want to hide the fact that they are not acting in their clients’ interest. On the other hand it is totally befuddling why a fiduciary would “send the fool a little further” and instead of letting everyone know that they put the clients’ interests first. True fiduciaries act responsibly in all their dealings and never hide behind legal nuances to avoid the responsibility.

In essence being a fiduciary is not a vague, elusive cat and mouse game, but an uninterrupted commitment to always act in the client’s interest.


"Childish" might be overstating things a bit
Created by Anonymous in 10/25/2012 2:32:33 PM
While the point is well taken, the approach is somewhat bombastic - probably to generate some publicity. We are a TPA that is NOT a fiduciary, and our service agreements clearly state that. However, I don't fault similar TPA's who do not explicitly state this. When regulatory standards require only that you state specifically what you are, it is a slippery slope to start disclosing everything that you are not. This can lead to an excessively confusing disclosure doing nothing more than CYA on items that simply are not applicable. We've spoken with one of your representatives, and seen your disclosure program, and your firm does good work on disclosures - but this type of rant does not enhance your professional reputation.
Created by Errold Moody in 10/24/2012 3:04:10 PM
If an entity indicates that they are acting as a fiduciary in any capacity, they cannot unilaterally downgrade themselves to a lower responsibility. It is stupid to even attempt that because when brought up on charges for a breach of duty "when acting as (supposedly) a non fiduciary" the on again and off again entity would be forced to take the high road as a fiduciary in testimony and state that the activities of her/himself at the lower level were wrong. Circular reasoning in a way but valid nonetheless.

As for fiduciaries in the real world advising on investing, they generally do not exist. The fundamentals of investing have never been taught to a broker. RIAs generally use the Series 7 securities license to indicate competence. Nothing there as well. I do not believe you have many plan sponsors that have a clue to diversification- it is not taught in the securities exams. And if you do not know diversification by the niumbers, you do not know risk. If you do not know risk, you cannot determine sujitability.

401k instruction must include the risk of loss for any portfolio allocation and provide to any participant. It is NOT done by firms because if consumers/employees knew of the risk, they would demand a lot more knowledge by the fiduciary- certainly as would/should have been evident by the debacle of 2000 and 2008. Investors were led to do stuff by fiduciary entities that were clueless to risk

And no one has said anything. Fiduciary remains just a word.

Errold F Moody Jr
Life and Disability Insurance Analyst
Registered Investment Adviser
Author: Financial Planning Fiduciary Standards under Dodd Frank (2012)
The Failure of Securities Arbitrations (2012)ryxelz

Created by Dennis P Lynch in 10/24/2012 2:52:49 PM
Thank you Louis, for an excellent and timely article. In my work with retirement plan sponsors, I am finding the lack of full disclosure to be more the rule than the exception. In addition to the childish games you mentioned, I have encountered a "silo" response to fiduciary status and potential conflicts of interest. For example, ABC Advisors, ABC Insurance, ABC Brokers, & ABC Administrators may share a common owner, but since each reports only on their business "silo", no potential conflicts are mentioned. Unfortunately, purely objective advice continues to be elusive. Keep shining that bright light!
Depends on which side one is on.
Created by Anonymous in 10/24/2012 1:50:39 PM
One's childish game, is another's firewall from client blame shifting and lack of responsibility. Being with one of the big recordkeepers, although some of what you state rings true (some, not all, at least with our firm), the other side of it is client's not understanding fiduciary 101, that it is their plan, that they can't shift all liability to someone else. The fact of the matter is that all of this is academic, and only truly determinable in court (i.e. who is a fiduciary). Perhaps the easier route to bliss with client and industry is to make it an IRA free for all. No plans, no liability, do it yourself (and lose it yourself).

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Louis S. Harvey
President & CEO



Founder and leader of Dalbar, Lou Harvey is relentless in the search for the forces that are shaping the world of financial services today, tomorrow and for years hence. Using Dalbar’s research capabilities, Lou Harvey seeks insights from inside and outside the industry to understand and anticipate changes in customers’ needs and the ways products are distributed.


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