David vs Goliath

A Higher Calling for a Greater Standard of Fiduciary Care

Disclaimer: This article contains information that was factual and accurate as of the original published date listed on the article. Investors may find some or all of the content of this article beneficial but should be aware that some or all of the information may no longer be accurate. The information and/or data in this article should be verified prior to relying on it when making investment decisions. If you have any questions regarding the information contained in this article please call IFA at 888-643-3133.

David vs Goliath

The call for a universal fiduciary standard of care between investors and financial advice-givers has been a hotly debated issue in Washington and across world capitals. But in a new 18-page bulletin issued by the Vatican, Pope Francis argues for stricter regulatory controls amid economic "globalization" and rising "threats to the common good."

 "The regulations must favor a complete transparency regarding whatever is traded in order to eliminate every form of injustice and inequality, thus assuring the greatest possible equity in the exchange," the Pope wrote in a wide-ranging critique of the state of global finance.  

In his text, Pope Francis doesn't use the word "fiduciary." But his meaning is clear in terms of guiding all human persona through their everyday financial lives and those who dispense such advice: Strong moral judgment goes hand-in-hand with sound business practices.

Warning of "systemic crisis" from political efforts to practice "massive deregulation," the bulletin makes a case for "a clear definition and separation among banking responsibilities" in managing individual loans as well as personal savings. "The savings itself, when entrusted in the expert hands of financial advisers," the Pope continues, "needs to be administered well, and not just managed."

The bulletin goes further, referring to "morally questionable activities of financial advisors" such as "an excessive movement of the investment portfolio commonly aimed at increasing the revenues deriving from the commission for the bank or other financial intermediary."

Besides churning of investments, other unethical practices the Pope calls out include: 

  • A lack of "impartiality" in offering products and services that best suits clients' needs.
  • The "scarcity of an adequate diligence or even a malicious negligence on the part of financial advisers" about protecting client portfolios and "related interests" best serving investors.
  • Offering financial products not "convenient" to a client and "issued by the same," alluding to the often-criticized practice of selling proprietary products that aren't always the best fit for an individual's particular circumstances.

The bulletin reinforces a need for all financial services professionals to act ethically both in their offices as well as in their communities. The goal should be to create a culture in which "mere profit" isn't placed "at the summit of a financial enterprise," according to the Pontiff.

Pope Francis goes on to admonish deceptive lending practices, use of derivatives in investment vehicles and hiding of assets "offshore" in order to avoid taxes. The Pope urges consumers to "vote with your wallet" by directing personal savings to "those enterprises that operate with clear criteria inspired by an ethics respectful of the entire human person, and of every particular person, within the horizon of social responsibility."

While not specifically referring to U.S. consumer efforts to bring greater regulatory unity in rules pertaining to how brokers give financial advice, the alert to the world's clergy strikes at the heart of an ongoing American political battle to create a higher level of fiduciary care.

The Department of Labor's fiduciary rule, which seeks to create a higher fiduciary standard for retirement plans (both employer-sponsored plans and individual retirement accounts), remains a question mark amid legal and political wrangling to derail full-implementation.

But rule or no rule, the latest message being advanced by Pope Francis points to something I've been writing about for years: investors need to insist on only taking financial advice from a true fiduciary.

Pope Francis gives us an important reminder that we are all empowered as God's children to act in our family's best interests. In his latest bulletin's conclusion, he puts it this way: "In front of the massiveness and pervasiveness of today's economic-financial systems, we could be tempted to abandon ourselves to cynicism, and to think that with our poor forces we can do very little. In reality, every one of us can do so much, especially if one does not remain alone."

So, what is a fiduciary? In legal dictionary parlance, it's defined as "an individual in whom another has placed the utmost trust and confidence to manage and protect property or money."

Meanwhile, a fiduciary relationship is explained as one that "encompasses the idea of faith and confidence" along with demonstrable "loyalty and reasonable care of the assets" on the advisor's part.

Although most people probably assume that financial professionals are always acting in their best interests, it's important to understand that for brokers acting as someone's fiduciary is not a legal requirement.

In fact, there's a big difference between hiring a broker as opposed to an independent registered investment advisor. At an indie RIA, advisors are required to act in their clients' best interests. On the other hand, a broker is typically held to a legal standard of "suitability," which can be less stringent in terms of what professionals buy and sell for investors.  

Mainstream media outlets are expressing surprise at the Vatican's new bulletin and how Pope Francis has thrown such strong support behind the fight for common sense fiduciary standards. Perhaps it's just the timing, given a rising intensity between courts, politicians and consumer advocates in the U.S. over the DOL's rule.

But Pope Francis' admonition for investors to entrust their assets to fiduciaries – along with his desire for advisors to accept the higher standard of care embodied in the fiduciary mantle -- is the only true way to advance the common good.

In his bulletin, the Pope points to the critical role that true fiduciaries play in protecting the dignity and financial well-being of their clients in a collaborative and synergistic way. "It must be noted that the task of producing added value within the markets in a healthy way is realized by a unique function of cooperation," he wrote. "A loyal and intensive synergy of agents easily achieves that surplus vale toward which every economic achievement aims."

Indeed, a duty of loyalty is part and parcel of what it means to be a fiduciary.

Interestingly, the Securities and Exchange Commission has recently waded into the conversation by coming out with its own version, admittedly one that falls short of creating a unified standard bridging any fiduciary gap between advisors and brokers.

But consider the meaning of the word "fiduciary" and it becomes clear that such ongoing political tug-of-wars have a fundamental basis in religious thought and Catholic principles.

As noted by Pope Francis, a fiduciary standard of care is not something professionals in other industries see as a barrier, but as a universal standard that should be applied to anyone who engages in helping others.

Examples of fiduciary relationships include those between registered investment advisors and their clients, including individuals, foundations, endowments, trusts and retirement plans. But such relationships extend to: lawyers and their clients; physicians and their patients; CPAs and their clients; guardians and their wards along with directors and their shareholders.

That list becomes even more pivotal considering that priests, bishops, cardinals and His Holiness himself are all fiduciaries.

Why then should those providing financial advice or brokering investment transactions be expected to act any differently?

To put it bluntly, they shouldn't. As Pope Francis says in his latest bulletin, investing one's hard-earned savings needs to be done in a transparent environment where there's no confusion about an advisor's intentions.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, service, or considered to be tax advice. There are no guarantees investment strategies will be successful. Investing involves risks, including possible loss of principal. This is intended to be informational in nature and should not be construed as tax advice. IFA Taxes is a division of Index Fund Advisors, Inc. For more information about Index Fund Advisors, Inc. and Investing for Catholics, please review our brochure at https://www.adviserinfo.sec.gov/ or visit www.ifa.com.