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This article was edited on December 28, 2023 to remove an inaccurate paragraph about the fiduciary duties of physicians.
Sixty years ago this month, the United States Supreme Court affirmed that the Investment Advisers Act of 1940 obligated investment advisors to act as fiduciaries.
Last week, the Department of Labor heard testimony on its proposed Retirement Security Rule, which would extend the fiduciary requirement to broker dealers.
Many leading brokerage business and financial-services lobbyists strongly oppose the proposed rule. But their objections reflect basic misunderstandings of why fiduciary duties matter. Their basic premise is the rule is unnecessary. SIFMA’s December 12 testimony is representative.
The rule is needed to address conflicts of interest. Carlo V. di Florio, then director of the SEC Office of Compliance, Inspections and Examinations, spoke in 2012 of the “mortal threat” of conflicts of interest:
"Conflicts of interest can be thought of as the viruses that threaten the organization’s wellbeing. As in the microbial world, these viruses . . . if not eliminated or neutralized, even the simplest virus is a mortal threat to the body."
Tamar Frankel, professor of law emerita, Boston University, has researched and written on fiduciary law for over 50 years. She was inspired to pursue this research after attending a conference in Israel and hearing a talk by Professor Louis Loss of Harvard Law School.
In 2011, BU brought together dozens of scholars to present papers for a conference, “The Role of Fiduciary Law and Trust in the twenty-first Century: A Conference inspired by the work of Tamar Frankel.”
Earlier this month, I spoke with Professor Frankel in her home about the state of fiduciary law in investment advice and wealth management. Heer are excerpts of our conversation:
What interested you most in fiduciary law?
The nature of fiduciary relationships and establishing trust between an expert and a customer. We cannot “follow” our own legal or medical advice. We need experts. For society to flourish, we need experts to be trustworthy and trusted. We must have reliance on and confidence in their advice and conduct.
Why?
Trusting is two-sided. The upside is trustworthy advice, but the downside is a reliance on experts that make clients or patients vulnerable to harm when an expert abuses their trust.
What can be done to increase confidence and trust in finance?
To increase trust, we need to increase trustworthiness. The key is verification. Developing better ways for clients or patients to verify that the fiduciary puts the interests of the client or patient ahead of his own.
Fiduciary duties have diminished over recent years. Industry lobbyists have persuaded some regulators and many firms that conflicts of interest are no longer a virus that is a “mortal threat.” Conflicts of interest have been re-branded as something banal and harmless.
