Disclosure and its role in the advisory relationship became a major focus of panelists at a recent New York Society of Security Analysts/CFA Institute forum on “Wall Street’s Excesses: Bad Behavior and Over-Regulation.” The topic surfaced in the first panel on enforcement, when the question was raised, “Can an advisor ‘disclose away’ her or his fiduciary obligations simply by surfacing all conflicts and fees?”
Blaine Aikin, chief executive officer of fi360 and a CFP board member, took up the question on our panel on the fiduciary standard: “The answer to the question can you disclose away a fiduciary obligation is that the devil is in the ‘can you?’ You could probably escape punishment, but is it acceptable under the fiduciary standard to ‘disclose away’ a fiduciary duty. The answer is clearly ‘no.’”
“Disclosure is not a substitute for fulfillment of the duties of loyalty and care. We have gaping holes in the way that the law is enforced today. [That’s why upholding professional standards] becomes a critical function for organizations like the CFA Institute and the CFB Board.”
“With the CFP Board, you have a disciplinary process that brings [certificate holders] before professionals in the field. If you have people who are well informed in terms of the obligations that are involved – which you do in the disciplinary process of the CFP board – then you apply those standards in a way that understands that you can’t ‘disclose away’ professional liability.”
For my part, I noted studies by such leading academics as Prof. Daylian Cain at Yale School of Management, which indicate that disclosures can have a perverse effect.
According to Prof. Cain’s research, when an advise/or makes a disclosure to an investor – even a well-meaning advise/or – the investor feels more confident that the advise/or is being forthright and is thus less likely to question that advice. Moreover, the advise/or is more likely to give more aggressive advice that may tilt more to the advisor’s interests than those of the investor.
Bottom line: Disclosure and transparency are important but certainly no substitute for holding all advise/ors – registered reps, insurance agents and RIAs – to a strong fiduciary standard of care.
Kate McBride, AIFA®, founder of FiduciaryPath, LLC is an Accredited Investment Fiduciary Analyst®; a CEFEX analyst with the Centre for Fiduciary Excellence, auditing fiduciary firms’ investment fiduciary practices for certification; and a consultant on fiduciary matters. Ms. McBride serves as chair of The Committee for the Fiduciary Standard. firstname.lastname@example.org.