Fiduciary responsibility: A welcome, global and promising disruption

Fiduciary responsibility I hope you all saw our CEO, Len Brennan’s, recent letter to financial advisors in the USA. It outlines Russell Investments’ stance on the DOL rule and our invitation to help advisors. It offers our credentials as experienced and tested fiduciaries, and recognizes similarities between existing ERISA requirements and the DOL rule. We strongly feel that committed advisors will not just weather this storm, they will thrive in time because of it! I’d like to add a few points to Len’s foundation, developing his analysis that this rule is a genuinely disruptive industry event. Calling something ‘disruptive’ today is essentially meaningless. It’s a term so overused and often misapplied that it borders on being unoriginal. When we assert that the DOL rule is a genuine disruptor, we mean it in the good old-fashioned actual definition of the word – “a breaking asunder.” Without question there will be a break with established business procedures followed by a lengthy period during which the industry puts the pieces back together. But between today and that far off utopic moment in which the new standards become completely installed and perfectly enacted, there are both trap doors and stairways of opportunity for the astute advisor. The first step to the stairway is to avoid the trap door: understanding the regulator’s motivation and getting alongside them is equivalent to passing by the trap door. I freely concede it does not seem like this today, but I think this disruption has three qualities: it is welcome; it is global; and it is promising. It’s welcome because ultimately it aligns the interests of the client and the advisor. Given our heritage, it’s hard for us to understand why there should be any acceptable standard less than a client’s best interests, or why a client would ever settle for less. And while our industry must confront enormous and costly reconfigurations to accommodate it, our mission at Russell Investments is to help provide financial security to people. Bringing advice to a higher standard can only improve that outcome. I believe that reducing the number of retirement failures may have less to do with eliminating “shifty” advisors and more to do with eliminating the client’s excuse from shouldering their share of responsibility in the fiduciary equation: To listen to and take advice, even when it proves hard to do! It’s global in the sense that a series of near-identical rules have unfolded in advisory markets where we operate around the world. This fact underpins much of our optimism about this disruption. We hear in the DOL rule an echo of the Canadian Client Relationship Model (CRM), the Australian Future of Financial Advice, European Markets in Financial Instruments (MiFID 2), or the UK Retail Distribution Review (RDR). And we note that each one of those governments had not only the shared motivation, but their timing was catalyzed by the inescapable demographic reality: An insufficient ratio of workers to retirees. An assumption of civilized societies is a dignified old age, which typically entails independence, reasonable access to health care, freedom from poverty and its associated indignities. Progressive societies are judged by how they treat their frailest, and increasingly this means the elderly. From this vast principle stems the government's public contract with its citizens, encoded in public policy. In this way, the DOL is playing the role of the government's policy agent and its rule takes the form of the regulatory roadmap. The government is bargaining collectively for its at-risk citizens. But its collective bargaining is in one fashion self-serving: It knows that if it can't induce the private sector to help close the retirement underfunding gap, ultimately the government will stand alone to hold the bag. For this reason, I believe the momentum of this reform is irreversible. It’s promising, even if the promise is a ways off. Students of disruptions might appreciate an idiosyncratic attribute of this one. Disruption in recent times is most associated with technology. Think of Amazon and the revolution it inspired, first in retailing books, then in retailing anything at all. Or think of Uber and consider the initial narrow disruptive wave on the taxi business and the subsequent broadside assault on the necessity for urbanites to own private automobiles. The beneficiaries of these disruption start at the end of the barbells: The technology start-ups on one end and the consumer early adopters on the other. The joining of the two catalyzes the “disruptive event” and in time it reaches a tipping point and becomes adopted as normal by the typical consumer. In this case, the role of the technologist was played by the DOL – a regulator (and not even the regulatory agency that would have been most predicted to intervene!). Most interestingly – the consumer being protected is not so much the present day consumer as it is his or her future self. The rule seeks to protect the future, aging, decumulating, and perhaps less attentive, consumer. It's the client of today and tomorrow. The seminal difference between the current regulatory standard of suitability, and the proposed new “higher” fiduciary standard, is that in the future it will not be enough for a product to be suitable for the client today. Products and advice must be in the client’s best interest today and into the future if the central principal of the fiduciary standard is to be upheld. So what is so promising about that?! Advice is a process, not a product. It creates value only if the advice is good, and it is enacted. It takes two to tango. Once we pass through the initial, narrow disruption about share class abolitions and account documentation procedures, we will ultimately move on to the main event: How to create work processes that will enable advisors and partners to collaborate more effectively to both provide – and adhere to – quality advice. This is where the true ‘revolution’ can occur. Focusing consumers away from short-term performance ephemera and on to the fundamental question – the same one the government is asking of itself – “Can my assets meet my obligations?” Russell Investments has contributed to, and advanced, that discussion over the course of our 80-year history and we are prepared to continue to do that now, on our behalf, and, more importantly, on yours.