Fiduciary responsibility: A global and welcome disruption

The following is an abridged version of a longer post by Tim Noonan published on our companion blog earlier this week.


Disruptive is an overused term. When we assert that the latest U.S. Department of Labor (DOL) rule that impacts advisors is a genuine disruptor, we mean it in the definitive sense of the word—a breaking asunder. There will be a break with established business procedures followed by the industry putting the pieces back together. To navigate to the future state requires an understanding of the nature of the disruption.

I believe the DOL disruption has three qualities: it is welcome. It is global. And it is promising.

It’s welcome, because it aligns the interests of clients and advisors. Given Russell Investments’ fiduciary heritage (directly managing money for institutional clients since 1980), it’s hard for us to accept any standard less than a client’s best interest, or understand why a client would ever settle for less. A higher standard can only help to improve investor outcomes.

It’s global in the sense that a series of near-identical rules have unfolded in advisory markets where we operate around the world. We hear in the DOL rule an echo of the Investment Industry Regulatory Organization of Canada (IIROC) Client Relationship Model (CRM), the Australian Securities & Investment Commission (ASIC) Future of Financial Advice, the European Commission Markets in Financial Instruments (MiFID 2), or the UK’s 2013 Financial Conduct Authority (FCA) Retail Distribution Review (RDR).

Many judge progressive societies by how well they treat their elderly. I believe it is from this principle that the government’s public contract with its citizens, encoded in public policy stems. In this way, the DOL is playing the role of the government’s policy agent. The government is bargaining collectively for its at-risk citizens. But its collective bargaining is self-serving: It knows that if it can’t induce the private sector to help close the retirement underfunding gap, the government will likely end up holding the bag.

It’s promising, even if the promise is a ways off. Disruption in recent times is most associated with technology. Think of Uber’s initially narrow disruptive wave on the taxi business and the subsequent broadside assault on the need for urbanites to even own private automobiles. Tech disruptions typically start at the ends of the barbells: The technology start-ups on one end and the early-adopter consumer on the other. The joining of the two usually catalyzes the disruptive event until it becomes adopted as normal by the typical consumer.

In this case, the role of the technologist is played by the DOL. And the consumer being protected is not so much the present-day consumer, as his or her future self. The rule seeks to help protect the future retired, and perhaps less attentive, consumer. Products and advice must be in the client’s best interest today and into the future.

What’s so promising about that? Advice creates value only if the advice is good and is acted upon. It takes two to tango. Once we pass through the initial, narrow disruption about share-class and documentation, I believe we’ll likely move on to the main event: work processes that enable advisors and partners to collaborate more effectively to both help to 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: “Can my assets meet my obligations?” Russell Investments has contributed to, and advanced, that discussion over the course of our 80-year history. We’re prepared to continue to do that on our behalf and, more importantly, on yours.

Are you an advisor and would like to learn more about the DOL rule? Click here.