It took considerable time and effort to arrange an interview with Western Kentucky Finance professor Ron Rhoades.
In addition to tending to his own financial planning practice, blogging actively about fiduciary-related topics, and teaching during the chaotic first few weeks of pandemic-era classes, he has been preparing to be honored by an industry he obsesses over on September 29.
That’s when Rhoades will receive the 2020 Frankel Fiduciary Prize. The Institute for the Financial Standard made Rhoades the 2020 recipient due to his role as “one of the most prolific authors of papers and comment letters on fiduciary duties for investment advisors and broker-dealers in this century.”
Thanks to the efforts of Rhoades and other industry thought leaders such as Bob Veres, Michael Kitces, and Allan Roth, fiduciary standards have become a hot topic in the financial planning industry. That wasn’t always the case. “If you go back 20 years, the word ‘fiduciary’ was rarely mentioned,” says Rhoades. “Since then, the number of academic papers written on the topic has grown tremendously.”
This is an area where academics and practitioners have led the way without much of a helping hand from regulators. “We haven’t had a strong and reform-minded SEC (Securities and Exchange Commission) chair since Arthur Levitt,” says Rhoades. Levitt retired 19 years ago.
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Rhoades is especially critical of the current crop of regulators. “In my view, SEC Chair Jay Clayton will go down in history as the worst SEC Chair ever,” he wrote in a scathing blog post. He added that the SEC has moved to “water down the fiduciary standard, redefine ‘best interests’ as something other than the fiduciary duty of loyalty, and advances the positions that so many broker-dealers desire — to be "trusted advisors" without being truly held accountable for the advice that they provide.”
Rhoades testified this month before the U.S. Department of Labor (DOL) on one of the latest sources of contention in the financial services industry, the role of retirement plan consultants in the provision of fiduciary-level investment choices for employees in retirement plans.
In June, the DOL had proposed a legal change that merely required retirement plan consultants to be fiduciaries in rare instances. The DOL suggested that compliance with the weak SEC’s Regulation Best Interest would be all that would be required of brokers who were fiduciaries under ERISA (the Employee Retirement Security Act). That frees them from any liability for the types and costs of investment choices offered in 401(k) and 403(b) plans. Employers “don’t understand the scope of their fiduciary duties under ERISA and they certainly don’t understand the requirements of the prudent investor rule,” says Rhoades.
Major class action suits against retirement plan sponsors have already been settled, with nearly $500 million in settlements in 2019 alone. Notably, the companies offering such plans were found liable — not the retirement plan consultants themselves. “They’re leaving the employers on the hook for all the damages,” says Rhoades. “It’s a huge problem and Congress or the DOL can remedy it if they choose to do so.”
Those first suits targeted large employers. Rhoades says that such class action suits are now targeting mid-sized and smaller companies. “Plan sponsors should be entitled to rely upon the investment recommendations made by consultants to them, and those consultants should be held accountable.”
While Rhoades notes that there hasn’t been a highly proactive and reform-minded SEC chair since Levitt left, Obama era administrators deserve credit. They proposed stricter fiduciary rules soon after assuming SEC leadership in 2009 only to see an extensive amount of haggling, preventing the new rules from becoming law in 2016. Two years later, the 5th U.S. Circuit Court of Appeals overturned the DOL’s rule. And since then, in addition to the DOL’s now watered down new proposed fiduciary rule, the SEC has adopted a “Regulation Best Interest” rule. “There is so much disappointment about Reg BI,” says Rhoades. “It doesn’t even come close to representing true fiduciary standards.”
Still, we may not see a return to the rules that were enacted into law in 2016. The Circuit Court ruling in 2018 “may prevent a full restoration of the rules enacted two years earlier,” according to Rhoades.
If there is a change of control in Washington, we may see some sort of swing back towards higher fiduciary standards. That would depend on what kind of SEC Chairman Democrats look to put in place. Rhoades notes that “corporate Democrats” such as New York Senator Chuck Schumer have tended to espouse pro Wall Street views in the past. And Wall Street broker-dealers are much in favor of watered-down rules.
However, if a new SEC chair comes from academia or a Senate staff position, then there is a greater likelihood of a reform-minded SEC chair says Rhoades. Nonetheless, Rhoades laments the current state of political interference into what should be an insulated sphere of rule-making. “20 years ago, the SEC wasn’t very partisan, they used to have 5-0 votes.” “Now, “he says,” you have 3-2 votes split along party lines.”
The silver lining for RIAs that act as true fiduciaries (not those who cynically embrace the moniker) is a growing awareness among clients about the topic that has proven to be a boon. “Firms tell me that today many prospective clients ask two questions: are you a fiduciary and are you a CFP?” says Rhoades. Sadly, “consumers still don’t understand that most advisors are not bona fide fiduciaries – those who seek to avoid conflicts of interest, rather than merely disclose them.”
With Rhoades set to accept the Frankel Fiduciary Prize on Tuesday, don’t look for him to recede quietly into the background. As noted, he is a prolific blogger, and unlike many academics, he does not mince words regarding this pitched industry battle.
David Sterman, CFP, is President of New Paltz, NY-based Huguenot Financial Planning