Yield of Dreams

Tamar Frankel: ‘Broker Push-Back Scares Me’

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"It’s not that I don’t want intermediaries to earn a fair living. On the contrary, I’d like them not to be hungry, just as I’d like everybody else not to be hungry. But I don’t want to see what I’m seeing now, and what I’m scared of seeing in the future."

Last week a group of 12 industry heavyweights, including the likes of Paul Volcker and John Bogle, announced their signing of a letter calling for regulators to move forward with a universal fiduciary standard of care. I had the pleasure of chatting with Tamar Frankel, professor at Boston University School of Law and one of the signatories. Frankel, 87, has been teaching and writing on fiduciary law for decades, and she’s one of the most esteemed authorities on trust and fiduciary issues. She has seen and been through a lot in her lifetime. One interesting thing she said about our financial system: People entrust either power or property to others for the purpose of benefiting them; but the problem is, people who have that power use it for other than what they were given it for.

Here’s what she had to say about the need for a fiduciary standard, and what’s wrong with our financial system today:

WealthManagement.com: Why do you think there’s a need for a fiduciary standard? Do you think brokers are the ones abusing that power?

Tamar Frankel: Brokers posit as salespeople. If I sell you a pair of shoes, you can put them on, you can try them. If it hurts, you won’t buy them. If it’s too expensive, you won’t buy them. You can test. Brokers sell, or used to sell, something which was not as testable as shoes are. But still people could understand what they’re buying.

With time two things happened. First, brokers were allowed to give both advice and to give also financial planning, which is much broader, without registration as advisors. If you’re doing financial planning, you have to know how much the other person has, how much he owes, what the relationship is with the parents, with the children, with the wife, with the husband, with everything. You get an awful lot of information. At the same time, you give advice that may be the best for you. At the same time, you’re not a fiduciary. In other words, all that information, all that power, the other person doesn’t have any idea of what he’s buying, but it is a sale. And I think that is wrong. I think that the exemption was wrong, but it was given years ago, and it had a different meaning then.

But now, what scares me is that we will have now millions of people that are retiring and who have to make the decision, because nobody’s making it for them, on what to do with the money on which they have to live. And they don’t understand, most of them, what is being offered to them, and they sign a waiver that says, ‘I agree that you are a broker, and therefore you are not an advisor, and I made the decision.’ And then when they lose the money, or when they pay much more than they should, or they pay a tremendous amount for just a change they’re making, these people will end without enough, or with less support and somebody, which is this society, will have to support them, or this society will begin to see people on the street, begging. And neither of these approaches is good for me.

When I see the push-back of brokers to the idea that when they give advice under certain circumstances, they should give the advice for the sole benefit or at least the best benefit of their clients, then I’m scared stiff because if that is the push-back, it tells me that a lot of money is being involved.

That’s why I want a change.

It’s not that I don’t want intermediaries to earn a fair living. On the contrary, I’d like them not to be hungry, just as I’d like everybody else not to be hungry. But I don’t want to see what I’m seeing now, and what I’m scared of seeing in the future.

WealthManagement.com: What about the timing of this fiduciary initiative? These issues have been tabled, put on hold… Why now?

TF: What we have here is an attempt to change culture, not to change another rule that people would demand to be very specific and then look for ways around it. We have enough of those rules, and the time has come to change how people who are in service think about themselves and think about their colleagues and about their profession. So this is not a one-time thing, or a month thing. This will take a long time.

One thing that it clear is that this will not go away. Now it will take years to change the culture, and if we stop, we will suffer again something similar to what we had and start all over again. I don’t believe a financial system can exist with this kind of culture.

I hope that those people who consider themselves just salespeople will begin to evaluate what they’re really doing to this society.

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Casting a gimlet-eye on asset management issues.

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