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The first of two articles on the state of investor trust.
“Fiduciary September” was invented by the Institute for the Fiduciary Standard to remind investors and the planning profession why fiduciary advice matters.
The investment advisor’s fiduciary duties derive from the Supreme Court (SEC v. Capital Gains Research Bureau, Inc. :: 375 U.S. 180 (1963) :: Justia US Supreme Court Center). Being a fiduciary means an advisor must fulfill the duties of loyalty, care and utmost good faith. From the Latin, fiducia means trust. Investor trust in finance and financial advisors is a pillar of the capital markets.
But it is transforming in front of us.
After the 2008-2009 financial crisis, restoring investor trust was the topic de jure. The Wall Street Journal’s Jason Zweig wrote in 2010 the crisis “shattered faith in the financial system itself” among investors.
Zweig’s prescription to restore investor faith? Admit mistakes and apologize. Have “more perp walks of Wall Street executives … because investors want the comfort that the bad guys are hurting.”
None of Zweig’s recommendations were taken seriously. Too many investors remain without faith.
In May, Financial Planning magazine reported on a survey from Morning Consult: “Advisors have a serious trust problem”. It stated that this “creates a challenge for advisors and wealth managers who have long made trustworthiness a pillar of their brands ….”
Advisors should worry. Boston University Law professor Tamar Frankel surveyed the financial trust landscape in 2006 and reported, to her deep dismay, how public attitudes had changed. From the 1930s until the 1980s, Frankel wrote, “Ordinary people condemned white-collar crimes” Not now, according to Frankel. Instead, they are “too tolerant and too comfortable” with deception and abuse of trust.
Frankel’s observation is important. Just how “tolerant” the public has become was captured at Tiburon’s April 2019 CEO Summit. Four investors shared their views at that meeting; by coincidence, each was a customer of Wells Fargo and were asked why. One, a manager at a large financial firm, elicited gasps from the C-suite audience when she said, matter-of-factly, “Every firm has some scandal.”
The Gallup Poll has ranked the honesty and ethics of occupations for decades. We can compare how different occupations fared in 2009-2010 to the most recent rankings in December 2019. Nurses have been at top of the rankings throughout the years (81 to 85%). The higher rankings of engineers (62 to 66%) medical doctors (65 to 65%) and pharmacists (66 to 64%) hardly budged in a decade.
At the low end were stockbrokers (9 to 14%), insurance salespeople (10 to 13%) and car salespeople (6 to 9%). Their ratings bumped up slightly but remained highly ranked by just a small minority of consumers.
Major market swings have had little or no impact on the reputations of insurance or securities reps. Occupations associated with sales are least trusted, while occupations associated with “advice” or a “profession” are most well-regarded. Nursing, the occupation perhaps most associated with both a profession and advice, comes out far on top.
The SEC’s view of investor trust rejects the underlying assumptions that financial advisors suffer from poor trust and that this lack of trust is a problem. Instead, according to the SEC, investor trust in their advisors is high and the financial illiteracy of investors is rampant. According to the SEC, investors are at fault for being too trusting and too financially illiterate.
In the SEC’s Reg BI press release, a study cited said 96% of investors “trust their financial professional.” It linked greater investor trust with “lower financial literacy.”
The data is revealing. Investor expectations of trustworthy advice have been diminished. Reputations of financial reps and advisors are stuck at 2009 levels. Only car salespeople were ranked lower by Gallup. Zweig’s advice has been ignored and the stock market has soared.
Fiduciary September will showcase fiduciary experts and industry leaders on the state of fiduciary on Zoom panels. Those panels defend and protect the idea Justice Harlan Fiske Stone expressed in 1934: “No thinking man can believe than an economy built on a business foundation can permanently endure without some loyalty to that (fiduciary) principle.”
Knut A. Rostad, MBA, is the co-founder and president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance the fiduciary standard through research, education and advocacy.