In recent weeks the words "fiduciary standards" has been elevated in the discussions surrounding financial reform and this is good. Largely these discussions have centered around Financial Advisers and Brokers though and not around where the largest pools of capital are invested - mutual funds and asset managers.
With respect to the discussions involving FA's and Brokers, largely the discussions come around to the "appropriateness" of certain investment asset classes for their clients, disclosures of fees and compensation, and whether or not the FA/Broker is putting the interests of their clients first and foremost. One would think that 70 years after the Investment Adviseries Act of 1940, 76 years after the Securities Exchange Act of 1934, and 9 years after Enron, Tyco, Worldcom, Global Crossing etc... looking out for the investors' interests would have been settled. And naturally what adds to the complexity for these two differing investment managers is that one is regulated directly by the SEC and state regulators - FA's, and the other falls into the category of SRO - a self-regulated organization under the Financial Industry Regulatory Authority, or FINRA - Brokers. And FINRA and the SEC both played large parts, for 20 plus years, in doing very little regarding the Madoff affair. So good luck with those fiduciary standards.
My concern with fiduciary standards has more to do with ideas expressed by Vanguard founder and "Grand-Old-Man" of low-cost mutual fund investing, John Bogle. Institutional fund managers and fund firms - the single largest owner-shareholders of stock in America, and worldwide, need to get more involved in corporate governance than they have been previously. When John Bogle looked back at the investment crisis earlier in this decade that gave rise to the costly and dubious legislation known as Sarbanes-Oxley, he saw a crisis not only in the idiocy that transpired in corporate America, but in the army of professional investment managers in this country who should have known better when assessing a potential company for investment selection.
In Mr. Bogle's view, these investment professionals should have been a first line of defense in uncovering some of this corporate foolishness and accounting lies, but because of inherent internal conflicts of interest, a lack of fiduciary duty, and near industry-wide view that corporate governance is for bow-tied, loafer-wearing academics in law schools a blind-eye was turned to red-flag issues that could have raised questions about Enron's accounting, Tyco's rubber-stamp board, out-sized options dilution, etc...
The subject of Corporate Governance is not just a topic for social activists and public-policy wonks to discuss at cocktail parties. Investment professionals have to take Corporate Governance into consideration as an investment risk. The same people who wouldn't buy a $500K or $1,000,000 home without it being inspected professionally are the very same people who are perfectly willing to take $500 million of other peoples money and invest it in the next Enron. This has to stop and bringing a fiduciary standard to the mutual fund and asset management industry would be an excellent way of starting.
