WEBVTT - Interview With Ron Rhoades: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.000 --> 0:00:10.240 So this week on the podcast, I have a really 0:00:10.280 --> 0:00:12.639 fascinating guest. And I know I said that every week, 0:00:12.680 --> 0:00:18.800 but this is really deep inside baseball. Uh, how how 0:00:18.840 --> 0:00:21.360 the industry works, how it's supposed to work, what it 0:00:21.440 --> 0:00:27.880 doesn't do. Ron Rhodes is a professor, lawyer, uh fiduciary. 0:00:27.960 --> 0:00:31.560 He has been both in and around the industry and 0:00:31.640 --> 0:00:34.479 a number of capacities, both as a lawyer setting up 0:00:34.479 --> 0:00:37.520 trusts in the States and other such stuff, running an 0:00:37.600 --> 0:00:41.879 r i A, running a fiduciary shop, and as a 0:00:41.880 --> 0:00:46.000 professor teaching financial planning and other things. He's probably best 0:00:46.040 --> 0:00:51.160 known as a gadfly who has been lobbying Congress, the SEC, FINRA, 0:00:51.320 --> 0:00:54.320 the Department of Labor. I call him a one man 0:00:54.400 --> 0:00:59.520 wrecking crew. He, amongst other people, prevented FINRA from becoming 0:00:59.560 --> 0:01:03.440 the uh S r O for the r A industry. 0:01:03.760 --> 0:01:06.959 He has been absolutely crucial in moving the ball down 0:01:07.000 --> 0:01:12.319 the field for moving towards a fiduciary standard for all 0:01:12.360 --> 0:01:17.440 advisors or many advisors. This is if you're interested in 0:01:18.200 --> 0:01:24.080 managing money, running a firm, or understanding the regulatory process 0:01:24.120 --> 0:01:29.640 and how it impacts investors and brokers and advisors. Uh, 0:01:29.640 --> 0:01:32.679 this is really a very deep dive into that sort 0:01:32.680 --> 0:01:36.119 of stuff. Stay with it. It gets more and more 0:01:36.160 --> 0:01:39.959 detailed and interesting as we go on, and the podcast portion, 0:01:40.200 --> 0:01:44.000 as you'll hear, is really terrific. So, without any further ado, 0:01:44.280 --> 0:01:51.560 my conversation with Professor Ron Rhodes. This is Masters in 0:01:51.640 --> 0:01:56.200 Business with Barry Ridholts on Bloomberg Radio. My special guest 0:01:56.280 --> 0:01:59.120 this week is Ron Rhodes. He is a professor at 0:01:59.160 --> 0:02:02.440 Western kentuck A University where he is chairman of the 0:02:02.480 --> 0:02:07.960 Financial Planning Program and teaches applied investments, retirement planning, and 0:02:08.240 --> 0:02:11.600 estate planning. You may not have heard of Ron if 0:02:11.639 --> 0:02:15.079 you're not in the asset management business or if you 0:02:15.160 --> 0:02:17.680 don't work for the SEC. But a little bit of 0:02:17.680 --> 0:02:21.120 background as to who he is. He was voted Wealth 0:02:21.200 --> 0:02:26.360 Management Magazines uh most influential person today. That was back 0:02:26.560 --> 0:02:32.200 in He is the recipient of the Tamar Frankel Fiduciary 0:02:32.240 --> 0:02:35.720 of the Year award, and he was named by Investment 0:02:35.800 --> 0:02:40.560 Advisor magazine one of the twenty five most influential persons 0:02:40.919 --> 0:02:44.760 in the asset management business. Ron, Welcome to Bloomberg Great 0:02:44.800 --> 0:02:47.560 thanks good to be here. So so that was a 0:02:47.560 --> 0:02:51.000 little bit of an ambiguous introduction. I want to ask 0:02:51.000 --> 0:02:54.720 you a question. For someone like me, you do many 0:02:54.720 --> 0:02:58.160 different things, You wear many different hats. But when people 0:02:58.360 --> 0:03:01.520 first meet you and in the conversation they ask what 0:03:01.560 --> 0:03:05.000 do you do? How do you answer that question? Well, 0:03:05.280 --> 0:03:06.880 you know, I asked people to think back to to 0:03:07.000 --> 0:03:11.360 their kids and as they were growing up. Um, kids 0:03:11.400 --> 0:03:15.239 need to be pushed, uh to develop and and that's 0:03:15.240 --> 0:03:18.880 why God invented mothers. But but those kids are sent 0:03:18.960 --> 0:03:22.000 off to college by their mothers. And that's why God 0:03:21.840 --> 0:03:25.000 invented college professors like myself. So your job is to 0:03:25.040 --> 0:03:28.080 push them in the right direction, push them expand their 0:03:28.120 --> 0:03:32.600 comfort zones, to show them how to develop and maintain 0:03:32.680 --> 0:03:36.400 relationships other than the relationship they have with their smartphone 0:03:36.520 --> 0:03:40.840 or their Facebook page, and uh, to get them the 0:03:40.840 --> 0:03:44.080 set goals and and really think about self improving themselves 0:03:44.160 --> 0:03:47.680 and and and getting ready for a career. But you 0:03:47.680 --> 0:03:50.600 you do more than push college students. You push the SEC. 0:03:51.320 --> 0:03:54.800 You fished, the Department of Labor. You push Finro, which 0:03:54.840 --> 0:03:59.880 is the brokerage world's self regulating organization. Let's let's talk 0:04:00.040 --> 0:04:03.840 little bit about how you found your way from the 0:04:03.840 --> 0:04:08.080 practice of law into finance and ultimately into academic How 0:04:08.160 --> 0:04:11.800 how did you find your way into finance as a lawyer? Now, 0:04:11.840 --> 0:04:13.680 it goes back to college years. You know. When I 0:04:13.760 --> 0:04:16.160 was going to college, I was working during the day 0:04:16.160 --> 0:04:20.680 at wal Disney World. I was a Disney character and Uh, 0:04:21.040 --> 0:04:23.240 I just remember all the time having a book about 0:04:23.240 --> 0:04:26.599 stocks or bonds. Uh. This is probably about nineteen eighty 0:04:26.680 --> 0:04:30.120 or so, tucked away in in my beer costume, and 0:04:30.200 --> 0:04:33.200 during breaks off stage, I'd be reading it. So you 0:04:33.240 --> 0:04:36.240 were a bear reading about stocks. There's some there's some ironing. 0:04:36.600 --> 0:04:40.520 I know. Yeah, that's that's that's neat. Uh. Yeah, you 0:04:40.560 --> 0:04:43.640 know ours blue and bear Bear and Little John and 0:04:43.720 --> 0:04:47.719 Goofy as well. Just my my clients used to say 0:04:47.760 --> 0:04:52.680 that they had a Goofy attorney. Uh, we're a bearish adviser. 0:04:52.720 --> 0:04:56.359 It's the same thing. So you're reading about stocks. But 0:04:56.440 --> 0:04:59.560 how do you make the transition from being a lawyer 0:04:59.600 --> 0:05:02.920 to to being full on in finance. Well, I was 0:05:02.960 --> 0:05:05.800 going to state planning and tax attorney, and and I 0:05:05.839 --> 0:05:11.479 got recruited to help a major financial services company, Uh, 0:05:11.680 --> 0:05:15.279 attack the four one K market with a retirement planning 0:05:15.320 --> 0:05:20.080 program and that lasted for about six months. UH enjoyed. 0:05:20.120 --> 0:05:22.480 It was glad to see the program kind of in 0:05:23.440 --> 0:05:26.039 because it involved flying up here to New York and 0:05:26.080 --> 0:05:28.560 back from Florida, where I was at the time, every 0:05:28.600 --> 0:05:32.160 week for twenty six weeks straight. But after that, UH, 0:05:32.320 --> 0:05:34.520 some c p as that I had helped put together 0:05:34.640 --> 0:05:38.440 their firm from a legal standpoint approached me and said, 0:05:38.480 --> 0:05:42.359 you know, we're not very happy referring who we're referring 0:05:42.360 --> 0:05:44.200 to right now, and I said, well, I'm not very happy. 0:05:44.520 --> 0:05:47.120 So they asked me to help them interview UH financial 0:05:47.160 --> 0:05:49.919 advisors in our community, and we did about a dozen 0:05:49.960 --> 0:05:54.240 interviews and nobody even came close to to meeting our expectations. 0:05:54.360 --> 0:05:56.200 And then we got together and said, we just need 0:05:56.240 --> 0:05:58.760 to do this ourselves. We don't want to send our 0:05:58.800 --> 0:06:00.599 clients here and here. We we need to do it 0:06:00.640 --> 0:06:03.560 the right way, and we explored eight different business models 0:06:03.600 --> 0:06:08.320 and ended up forming our own independent registered investment advisory firm. 0:06:08.400 --> 0:06:11.560 So that's kind of fascinating. So you kind of it's 0:06:11.600 --> 0:06:13.960 the old joke about Dick Cheney. You interviewed a lot 0:06:13.960 --> 0:06:16.760 of people for vice president and finally said there's no 0:06:17.000 --> 0:06:20.360 capable I'll do it. That that turned out to be true. 0:06:21.000 --> 0:06:24.920 Um so what then led to the transition to academia. 0:06:24.960 --> 0:06:27.279 You did that for a number of years. What brought 0:06:27.279 --> 0:06:30.240 you back to college? You know, if you're a good 0:06:30.240 --> 0:06:33.800 financial advisor, you're you're really a good educator. You like 0:06:33.920 --> 0:06:38.720 counseling and and kind of teaching colleges counseling on mass 0:06:38.760 --> 0:06:41.480 in essence, so instead of doing it one on one, 0:06:41.520 --> 0:06:43.040 you're doing it in front of a whole room full 0:06:43.080 --> 0:06:47.160 of minds. To be most and I always thought i'd 0:06:47.160 --> 0:06:49.640 get into teaching. When I was in law school. I 0:06:49.640 --> 0:06:52.320 would run study groups of a hundred people, and you 0:06:52.360 --> 0:06:54.760 know that the first year students, as a third year student, 0:06:54.800 --> 0:06:59.159 I'd be giving them a study instruction. But at the 0:06:59.200 --> 0:07:04.039 opportunity resented itself and I rushed for it because and 0:07:04.080 --> 0:07:06.480 I've never looked back, because that the students. It's so 0:07:06.560 --> 0:07:09.640 great to see them transform, even over the course of 0:07:09.640 --> 0:07:12.880 a semester, especially over two or three years. And I 0:07:12.960 --> 0:07:15.239 just love going to work at every day at Western 0:07:15.320 --> 0:07:19.040 Kentucky University. It's just a fantastic place to be. So 0:07:19.040 --> 0:07:22.080 so speaking of educating and counseling, in the last minute 0:07:22.160 --> 0:07:24.960 or so we have you've been pretty active on Twitter. 0:07:25.160 --> 0:07:28.600 You've been an active blogger for it seems at least 0:07:28.600 --> 0:07:33.080 five years. How do you find those mediums um are 0:07:33.160 --> 0:07:36.880 in terms of trying to get a message out. I'm 0:07:36.880 --> 0:07:39.600 pretty surprised when I go to industry conferences that the 0:07:39.680 --> 0:07:41.880 number of people who come up to me and and 0:07:41.920 --> 0:07:44.240 said that they've read my blogs and and we have 0:07:44.360 --> 0:07:48.040 a nice discussion about it. Um. I found you through Twitter. 0:07:48.120 --> 0:07:50.440 That's how I first. You know, I've been running about 0:07:50.480 --> 0:07:54.720 the fiduciary standards. Yes, yes, I thought it was kind 0:07:54.720 --> 0:07:57.200 of a lonely thing. And there's this guy, Ron Rhodes, 0:07:57.840 --> 0:08:01.360 just scorched earth, destroy everything in his path. I'm like, 0:08:01.720 --> 0:08:04.520 I have to follow this guy. Do people comment to 0:08:04.560 --> 0:08:06.400 you about Oh, I follow you on Twitter? I know 0:08:06.440 --> 0:08:09.520 who you are from that? Oh? Absolutely yes. I I 0:08:09.600 --> 0:08:11.720 don't really hold things back very much. I'm a little 0:08:11.760 --> 0:08:13.800 bit on the blunt side when it comes to things 0:08:13.800 --> 0:08:19.320 like so, I'm just I'm just a big soft bear. 0:08:19.600 --> 0:08:22.120 Is that what it is? I'm Barry rid Hilts. You're 0:08:22.160 --> 0:08:25.840 listening to Masters in Business on Bloomberg Radio. My special 0:08:25.840 --> 0:08:31.320 guest today is Ron Rhodes, Professor Ron Rhodes of Western Kentucky, University. 0:08:31.760 --> 0:08:36.000 He is an expert on fiduciary standards, has been a 0:08:36.080 --> 0:08:40.720 gadfly for the sec Department of Labor and especially finn Roe. 0:08:40.760 --> 0:08:43.200 We're gonna talk a little bit about that in a 0:08:43.200 --> 0:08:46.800 little while. Let's talk a bit about the financial planning industry. 0:08:46.800 --> 0:08:50.200 Where you have lots of background and and lots of 0:08:50.240 --> 0:08:55.079 published work. What do you think clients shouldn't expect from 0:08:55.120 --> 0:08:59.760 their relationship with a financial advisory In one word, trust 0:09:00.200 --> 0:09:03.280 and and and if you look at trust, it's really 0:09:03.320 --> 0:09:07.720 got three elements to it. The first is that the 0:09:07.760 --> 0:09:10.400 advisor before you is a true expert in what they do. 0:09:11.520 --> 0:09:14.720 The second is they're gonna put your best interests forth 0:09:15.280 --> 0:09:19.680 and keep those paramount above theirs. It's not about their 0:09:19.679 --> 0:09:24.040 commission also selling whatever product as the highest um bonus 0:09:24.120 --> 0:09:27.040 on it. It's about the client's interest. First, Yes, there 0:09:27.040 --> 0:09:30.200 are to be compensation that should be reasonable, agree to 0:09:30.280 --> 0:09:36.320 in advance, transparent, absolutely completely transparent, and and then work 0:09:36.760 --> 0:09:39.720 under that constraint to go out and find the best 0:09:39.880 --> 0:09:44.319 investment strategies and thevest best products to implement those strategies 0:09:44.600 --> 0:09:48.640 for the client. And lastly, it's candor. You know a 0:09:48.640 --> 0:09:52.600 lot of times clients really need to hear something they 0:09:52.920 --> 0:09:55.800 may not want to hear, like spend less money or 0:09:56.880 --> 0:10:01.600 uh control thyselves in some way, or you know, keep 0:10:01.640 --> 0:10:05.520 the emotions down, you know, stick with this market that 0:10:05.640 --> 0:10:09.559 we have conversations with people. Sometimes I'll get emails with 0:10:09.720 --> 0:10:12.480 people say I have this big inheritance and I want 0:10:12.480 --> 0:10:15.480 to seed four different hedge funds and whichever one gives 0:10:15.520 --> 0:10:18.240 me the best returns, That's what I'm giving my money to. Like, 0:10:18.320 --> 0:10:21.280 you understand game theory, right, you understand you just gave 0:10:21.360 --> 0:10:24.440 these guys an incentive to do nothing but throw hail 0:10:24.520 --> 0:10:27.120 Mary's because if they lose, hey, the odds are against 0:10:27.160 --> 0:10:29.920 them getting your money. And if they win, they they're 0:10:29.920 --> 0:10:31.839 not going to be able to put up those numbers again. 0:10:32.120 --> 0:10:35.920 So you've created a terrible situation. People don't seem to 0:10:35.960 --> 0:10:39.280 think those sort of things through. I think financial advices 0:10:39.280 --> 0:10:43.400 through a lot of keeping clients from making big mistakes 0:10:43.679 --> 0:10:48.720 and behavioral counseling. Absolutely that. In fact, almost every financial 0:10:48.840 --> 0:10:50.760 planner I've ever talked to you says, you know, I 0:10:50.800 --> 0:10:54.920 wish I had a minor in psychology, and and it's 0:10:54.960 --> 0:10:59.280 that important that that's quite interesting, So let's talk about that. 0:10:59.400 --> 0:11:01.600 That's one of of things I think the industry is 0:11:01.640 --> 0:11:04.600 doing right. What else is the industry doing right? And 0:11:04.640 --> 0:11:09.240 what else is it doing wrong? Well, I think what 0:11:09.360 --> 0:11:12.560 it's doing wrong? And where we really think seen things 0:11:12.640 --> 0:11:15.600 change over the last forty years as we went from 0:11:15.600 --> 0:11:20.320 this fixed commission structure and abandoned that in nine that 0:11:20.360 --> 0:11:24.640 was a good thing, but it's been replaced with a 0:11:24.679 --> 0:11:28.480 whole bunch of variable compensation where people can get paid 0:11:28.480 --> 0:11:30.760 a lot more money to sell one product over another, 0:11:31.600 --> 0:11:35.040 and just a ton of conflicts of interest and a 0:11:35.080 --> 0:11:39.199 lot of hidden fees. Clients have no idea what they're paying. 0:11:39.679 --> 0:11:42.840 I have had many a perspective client client coming to 0:11:42.880 --> 0:11:45.200 see me and they say, you know what, I've never 0:11:45.240 --> 0:11:47.960 paid my broker a dollar. You know, I get that 0:11:48.000 --> 0:11:50.400 on the bond side of things, they don't charge me 0:11:50.440 --> 0:11:54.600 any commissioners bonds. Well, that's because it's it's not you know, 0:11:54.640 --> 0:11:58.880 there's a difference between an agency transaction and a principal transaction. 0:11:59.120 --> 0:12:01.240 They're selling you by on is at a markup, not 0:12:01.320 --> 0:12:04.040 a commission. It's even worse right, No, no, no, it 0:12:04.080 --> 0:12:06.040 doesn't show that on any of my confidence. And then 0:12:06.040 --> 0:12:08.440 when I when I take them through and say here's 0:12:08.440 --> 0:12:11.120 the commission. Here's the twelve B one fees. Here's the 0:12:11.120 --> 0:12:13.720 payment for shelf space that the brokerage firm is getting 0:12:14.160 --> 0:12:17.240 of some amount. Okay, Like it's like it's potato chips 0:12:17.240 --> 0:12:18.680 in the supermarket if you want to be on the 0:12:18.760 --> 0:12:21.920 end gap. They're being the supermarkets for that placement. And 0:12:21.960 --> 0:12:24.920 they're soft all the compensation, and there's other revenue shary 0:12:24.960 --> 0:12:27.520 and gifts and the like. And when you start explaining 0:12:27.559 --> 0:12:31.600 this to clients, they typically get really angry because they 0:12:31.600 --> 0:12:35.000 thought that this guy was their best friend and it 0:12:35.000 --> 0:12:38.000 turns out that they were a very good product salesperson. 0:12:38.640 --> 0:12:40.679 The the old joke is if you want a friend 0:12:40.760 --> 0:12:43.360 on Wall Street, get a dog, And it's really true, 0:12:43.440 --> 0:12:47.400 because they're there to do the business of their firm. 0:12:47.480 --> 0:12:49.840 And I'm not saying there's anything wrong with that, but 0:12:49.960 --> 0:12:53.920 it's important that investors educate themselves and find out how 0:12:53.960 --> 0:12:56.680 that guy who's not charging you for those bond transactions 0:12:56.760 --> 0:12:59.200 is driving a really nice car and living in a 0:12:59.280 --> 0:13:02.840 really big hal us and doing it without much training, 0:13:02.840 --> 0:13:07.200 and what they do. It's almost as if sometimes when 0:13:07.240 --> 0:13:09.960 people get hired into some of the berg which firms nowadays, 0:13:10.320 --> 0:13:12.719 they get training and how to sell, of course, but 0:13:12.920 --> 0:13:16.280 they don't really get training and investment strategy and investment 0:13:16.320 --> 0:13:21.640 portfolio management, tax tax efficient investing, uh, all the things 0:13:21.640 --> 0:13:24.800 that they really should know to be experts, to know 0:13:24.840 --> 0:13:27.000 where close to be in ANET. Now that is a 0:13:27.120 --> 0:13:29.880 change from years ago, because I know when I was 0:13:29.920 --> 0:13:31.920 coming up. Look, I've been in this business for twenty 0:13:31.920 --> 0:13:35.280 plus years. I had friends that started at mary Lynch, 0:13:35.280 --> 0:13:38.280 started at Morgan Stanley, started at bear Stearns, and these 0:13:38.320 --> 0:13:42.280 guys went through a rigorous six month training program. Do 0:13:42.400 --> 0:13:45.600 these exist anymore? They have to still be around somewhere, 0:13:45.960 --> 0:13:48.800 or has the industry given up on training people and 0:13:48.840 --> 0:13:51.400 it's cfps and c f A s that or where 0:13:51.400 --> 0:13:55.000 all the training take place. I think for a large 0:13:55.040 --> 0:13:58.280 part they went away. And and the old model that 0:13:58.360 --> 0:14:02.400 you perhaps grew up in, the old party marty commercial, Uh, 0:14:02.480 --> 0:14:04.720 we make money the old fashioned way we earned it, 0:14:05.160 --> 0:14:08.120 that largely disappeared and it's now just beginning to get 0:14:08.160 --> 0:14:12.800 back come back. In part of this because people want 0:14:12.840 --> 0:14:16.720 advice people, and it's really a lot more complicated world 0:14:16.760 --> 0:14:21.280 out there. Sure financially tax wise, people don't need just 0:14:21.400 --> 0:14:25.440 investment advice. They need financial advice, financial planning, and and 0:14:25.480 --> 0:14:29.720 that's where you see things like the UH Certified Financial 0:14:29.760 --> 0:14:33.600 Planning Board of Standards with their CFP certification becoming really 0:14:33.680 --> 0:14:37.920 priced as a standard for investors. So we've seen the 0:14:37.960 --> 0:14:40.800 industry change a lot over the past couple of years, 0:14:40.800 --> 0:14:43.560 past couple of decades. What do you think are the 0:14:43.600 --> 0:14:47.080 next couple of changes we're gonna see going forward? UH 0:14:47.120 --> 0:14:52.720 this year is likely to be transformational. Transformational. Now we 0:14:52.760 --> 0:14:55.960 know the Department of Labor Fiduciary standards coming. We're gonna 0:14:56.000 --> 0:14:59.120 talk more about that in our last segment. But what 0:14:59.200 --> 0:15:03.960 else do you see changing the landscape for investors? Well, 0:15:05.280 --> 0:15:07.600 the fiduciary Standards is going to change it and in 0:15:08.000 --> 0:15:10.240 a lot of different ways. So let's look at the 0:15:10.760 --> 0:15:13.440 longer term impacts of this. There are some things that 0:15:13.480 --> 0:15:15.800 exist now which a lot aren't you going to go away? 0:15:16.200 --> 0:15:19.880 If not by the regulators themselves, just from a standpoint 0:15:19.920 --> 0:15:24.000 of having a more competitive marketplace. One, fees likely to 0:15:24.040 --> 0:15:30.000 be gone, okay, payment for self space okay, proprietary funds 0:15:30.600 --> 0:15:32.920 a lot less, a lot less of that. How much 0:15:32.920 --> 0:15:35.640 of this is driven by the massive inflows we see 0:15:35.680 --> 0:15:38.960 into Vanguard. That's just in the last minute. We have 0:15:39.040 --> 0:15:42.040 Vanguard is sucking up all the oxygen the room, and 0:15:42.080 --> 0:15:45.320 all the active managers out there seem to be flailing. 0:15:45.560 --> 0:15:52.080 Is that a competitive factor that's driving this to some degree? Yes, 0:15:52.120 --> 0:15:54.760 because once you start eliminating all these hidden fees and 0:15:54.800 --> 0:15:58.080 you get down to lower fees, all the academic research 0:15:58.120 --> 0:16:01.960 shows lower fees means higher return for investors, and investors 0:16:01.960 --> 0:16:04.520 to starting the catch onto this, I'm Barry Ridhults. You're 0:16:04.560 --> 0:16:08.400 listening to Masters in Business on Bloomberg Radio. My special 0:16:08.440 --> 0:16:12.680 guest today is Professor Ron Rhodes. He's from Western Kentucky 0:16:12.800 --> 0:16:17.960 University and a specialist in various forms of financial planning 0:16:18.160 --> 0:16:22.840 and the rules and regulations and standards that governed the 0:16:22.960 --> 0:16:26.840 different participants in the market. Let's talk a little bit 0:16:27.520 --> 0:16:31.320 about this and and and start out really broadly, put 0:16:31.320 --> 0:16:34.000 on your lawyer's hat and explain what is it that 0:16:34.080 --> 0:16:37.200 a duty of care is, who's it owed to and 0:16:37.200 --> 0:16:41.120 why is this important? Well, for financial services, what it 0:16:41.160 --> 0:16:44.920 means is you have to have a certain level of 0:16:44.960 --> 0:16:51.000 expertise and apply that expertise uh in designing investment strategies 0:16:51.040 --> 0:16:54.840 and selecting investment products. And that's part of a duty 0:16:54.880 --> 0:16:58.040 of care of the fiduciary standards of duty care. The 0:16:58.040 --> 0:17:01.120 other part is the duty of loyalty, which means you've 0:17:01.120 --> 0:17:05.600 got to keep the client's best interest paramount. What's interesting 0:17:05.680 --> 0:17:09.439 is that most brokers who are not acting as fiduciaries 0:17:09.840 --> 0:17:13.439 don't have either of these duties. They're not obligated to 0:17:13.440 --> 0:17:16.680 have any sort of expertise that when they're not obligated 0:17:16.720 --> 0:17:20.000 to with the clients uh interest. Fact, they're just governed 0:17:20.000 --> 0:17:24.280 by a suitability standards something that's far less. It's amazing 0:17:24.280 --> 0:17:26.879 in this world that we have so many service providers 0:17:26.880 --> 0:17:30.320 that have a duty of care and what the suitability 0:17:30.359 --> 0:17:33.040 doctrine really does. It was adoptive way back in the 0:17:33.520 --> 0:17:37.440 earlier twenty century when the whole theory of negligence was 0:17:37.600 --> 0:17:41.200 developing in the law was. It basically was enacted because 0:17:41.200 --> 0:17:44.760 we didn't want to hold brokers responsible for stock recommendations 0:17:45.080 --> 0:17:48.960 when they were only executing stock trades and listen, stocks 0:17:49.000 --> 0:17:51.879 go up and down. You can't hold people responsible for 0:17:52.200 --> 0:17:57.280 good faith bad choices. But suitability is such a low standard. 0:17:57.280 --> 0:17:59.520 I used to call that don't sell I p o 0:17:59.560 --> 0:18:02.560 s to grant MS standard. But but there's a little 0:18:02.560 --> 0:18:05.840 more to it. Explain exactly what suitability means and how 0:18:05.920 --> 0:18:12.800 much different that is than fiduciary Suitability essentially says, don't 0:18:12.920 --> 0:18:16.000 sell things that explode that you know we're going to explode, 0:18:16.400 --> 0:18:20.800 and perhaps for elderly clients, don't even sell firecrackers. All right, 0:18:21.320 --> 0:18:24.680 But suitability is basically says you don't have a duty 0:18:24.680 --> 0:18:27.240 of care. All you have to do is make sure 0:18:27.320 --> 0:18:32.160 that this investment could be held by this particular client. 0:18:32.400 --> 0:18:34.760 It doesn't have to be the best investment if it's 0:18:34.760 --> 0:18:37.280 in a taxable account, it doesn't have to be tax efficient. 0:18:38.359 --> 0:18:41.160 It doesn't have to be a low cost investment. In fact, 0:18:41.200 --> 0:18:44.800 it can be a very high cost investment. Yeah. And 0:18:45.840 --> 0:18:49.160 from the standpoint, it doesn't even require you to think 0:18:49.200 --> 0:18:53.440 about an entire portfolio together and how you can minimize 0:18:53.440 --> 0:18:56.240 the risk in that portfolio. It doesn't even require the 0:18:56.280 --> 0:18:59.280 application of what we've known for sixty five years now, 0:18:59.320 --> 0:19:02.880 modern PORTFOLI theory. So is it fair to say suitability 0:19:03.080 --> 0:19:06.160 is can be summed up as try not to be reckless? 0:19:06.320 --> 0:19:09.480 Is it? Is it that lowest standard? I think it 0:19:09.520 --> 0:19:12.240 actually allows people to be reckless. I think it's I 0:19:12.320 --> 0:19:15.720 think it's below that point, so recklessness, all right? It 0:19:15.760 --> 0:19:20.680 was reckless, but it wasn't unsuitable. Gross negligence perhaps is 0:19:21.040 --> 0:19:27.080 is outall and a suitability is really a standard that 0:19:27.160 --> 0:19:29.960 it's very difficult to actually say what it is. It's 0:19:29.960 --> 0:19:32.600 so vague. So so let's talk a little bit about 0:19:32.680 --> 0:19:35.560 the regulator in this space. The brokerage world has a 0:19:35.880 --> 0:19:40.280 s r OH, a self regulating organization formally NASDAC or 0:19:40.440 --> 0:19:43.959 any SDR. Now it's FINRA. You have been a major 0:19:44.119 --> 0:19:50.960 thorn in their side, mostly about this suitability standard and 0:19:51.080 --> 0:19:55.600 their opposition to the fiduciary standard. Tell us a little 0:19:55.600 --> 0:19:58.800 bit about your your relationship with FINRA. Let me take 0:19:58.840 --> 0:20:03.800 this to the back in night Senator Maloney who was 0:20:03.840 --> 0:20:06.240 the author of the Maloney Act that led to the 0:20:06.280 --> 0:20:09.640 creation of any s D which is now FINRAD. He said, 0:20:09.960 --> 0:20:12.720 the purpose of this s r OH is to create 0:20:12.760 --> 0:20:17.160 an organization that will gradually, over time raise the standard 0:20:17.200 --> 0:20:19.639 of conduct for those in the securities business to the 0:20:19.720 --> 0:20:23.520 various highest standard and the law, in other words, raise 0:20:23.600 --> 0:20:26.920 it to the fiduciary standard. That vision has never been 0:20:26.960 --> 0:20:28.919 put in place. You know, if you go back to 0:20:28.960 --> 0:20:34.119 the forties, uh findra it's its biggest accomplishment. It wrote, 0:20:34.480 --> 0:20:39.080 was uh not was preventing the separation of brokers from dealers. 0:20:39.760 --> 0:20:42.320 All right, well, that's a conflict of interest situation. They 0:20:42.440 --> 0:20:46.760 basically led to this huge conflict of interest in financial services. 0:20:46.800 --> 0:20:50.359 They maintained that when they adopted their first rule book 0:20:50.359 --> 0:20:53.720 in even though they acknowledged in their first newsletter that 0:20:53.800 --> 0:20:57.080 brokers are often fiducaries to clients, that they have a 0:20:57.119 --> 0:21:00.320 relationship of trust and confidence with there's nothing in the 0:21:00.320 --> 0:21:03.920 finer rule book. Now we're back then this has the 0:21:03.960 --> 0:21:06.359 word fiducry in it. So in the last minute we 0:21:06.440 --> 0:21:09.200 have in this segment, there was a time not too 0:21:09.200 --> 0:21:13.200 long ago when FINRA made a play to take over 0:21:13.280 --> 0:21:17.199 managing or supervising um the r I a world, the 0:21:17.240 --> 0:21:22.199 registered investment advisory world currently supervised by the SEC. You 0:21:22.320 --> 0:21:25.639 pretty much were a one man wrecking ball that stopped that. 0:21:25.880 --> 0:21:28.280 Tell us a little bit about how that happened. I 0:21:28.320 --> 0:21:30.120 think there were a lot of people involved in that 0:21:30.160 --> 0:21:34.040 effort to stop them. It was a bill that's coming 0:21:34.080 --> 0:21:37.760 out of the Senate and that was proposed, and there 0:21:37.800 --> 0:21:40.879 was just a lot of opposition from consumer groups for 0:21:41.000 --> 0:21:44.840 myself but many others to that to basically say, listen, 0:21:44.840 --> 0:21:48.159 we shouldn't be rewarding FINRA by giving them oversight of 0:21:48.600 --> 0:21:53.000 investment advisors. Yes, we need more oversight, we need more inspections, 0:21:53.000 --> 0:21:54.840 but this is not the way to do it. I'm 0:21:54.880 --> 0:21:58.480 Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. 0:21:58.760 --> 0:22:01.920 My special guest today is Professor Ron Rhodes. He is 0:22:01.960 --> 0:22:07.600 an expert on fiduciary standards and legal obligations that advisers 0:22:07.960 --> 0:22:12.320 owe their clients, namely the investment community. Let's talk a 0:22:12.359 --> 0:22:16.159 little bit about the fiduciary standard. Back in two thousand 0:22:16.240 --> 0:22:19.320 and eleven, as part of the Dodd Frank Rules, the 0:22:19.440 --> 0:22:23.560 SEC had a research a um put together a study 0:22:23.760 --> 0:22:28.040 on the appropriate standards for brokers and advisors and all 0:22:28.040 --> 0:22:30.600 sorts of people in the industry, and they put out 0:22:30.640 --> 0:22:34.280 this long research report. I actually published it on the 0:22:34.320 --> 0:22:39.000 blog some time ago. Uh that specifically said, and I'm quoting, 0:22:39.280 --> 0:22:43.439 all financial advisors and stockbrokers should be placed under a 0:22:43.640 --> 0:22:48.560 uniform fiduciary standard. First, what does that mean? And second, 0:22:48.760 --> 0:22:53.400 why hasn't that happened? Back in two thousand eleven that 0:22:53.400 --> 0:22:57.600 that study came out from the SEC staff, and we 0:22:57.680 --> 0:23:01.760 had spent a lot of time with the SEC myself 0:23:01.800 --> 0:23:06.320 and many other fiduciary advocates, educating them about the fiduciary 0:23:06.359 --> 0:23:09.080 standard and why it was so important and what this 0:23:09.119 --> 0:23:12.000 would mean if it was adopted, And it came out 0:23:12.080 --> 0:23:14.480 with what I thought was a pretty strong report on it, 0:23:14.760 --> 0:23:17.120 very very strong. Yeah, you can you can tell by 0:23:17.119 --> 0:23:20.240 the pushback to it immediately from the rest of the industry. 0:23:20.400 --> 0:23:23.399 The SEC commissioners did not sign off on. That is 0:23:23.440 --> 0:23:26.879 not signed by any SEC commissioner. Uh. Kind of an 0:23:26.880 --> 0:23:29.920 indication of the split and the commission that has persisted 0:23:29.960 --> 0:23:33.639 for probably at least a decade now. UH. But you 0:23:33.640 --> 0:23:36.760 know now that the situation at the SEC has quite changed. 0:23:37.000 --> 0:23:41.520 You have you always have staff turnover, and the senior 0:23:41.560 --> 0:23:44.240 staff at the SEC, they all worked on the Wall 0:23:44.280 --> 0:23:47.600 Street before, uh, and they a lot of them worked 0:23:47.600 --> 0:23:49.600 at the SEC, went to Wall Street, came back. A 0:23:49.600 --> 0:23:53.640 little bit of revolving do going on tremendous And one 0:23:53.640 --> 0:23:56.280 of the interesting things is, and it doesn't happen for 0:23:56.320 --> 0:23:59.640 all the SEC staff, but but it does happen generally 0:23:59.680 --> 0:24:03.399 between New York and Washington. You leave Wall Street, you 0:24:03.480 --> 0:24:06.480 get a bonus to go work at a government agency 0:24:06.880 --> 0:24:08.679