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Neuro-Fiduciary: Using Neuroscience to Amplify Fiduciary Metrics

Neuro-Fiduciary is a new industry term that has evolved to represent the use of neuroscience to help amplify, infuse, and improve the quality of a fiduciary’s decision-making process. Of particular importance, its framework can be used to illuminate the process for building client trust and loyalty.

Background

There have been no real advancements in fiduciary best practices since the Foundation for Fiduciary Studies published the seminal handbook, Prudent Investment Practices, in 2003. A lot has changed in the past 14 years, and the subject of fiduciary responsibility warrants a makeover.

Neuro-Fiduciary is focused on the specific leadership and stewardship behaviors that affect the quality of fiduciary metrics. It’s a derivative of the research being conducted in the field of behavioral governance, which is focused on improving the decision-making process of leaders who have legal, financial, professional or moral liability for their governance process.

The U.S. Department of Labor has had a big impact – but not for reasons that you would expect. The DOL’s conflict-of-interest rules don’t define a fiduciary standard, and don’t reflect generally accepted best practices associated with the management of investment decisions. In addition, the DOL and its proponents have conducted a very public, derogatory, and inflammatory campaign against the financial services industry. The net effect is that there is even more confusion about what constitutes a fiduciary standard of care, and considerably more mistrust between investors and our industry.

A Fresh Approach

Neuro-Fiduciary provides a framework that will enable the industry to make exponential strides in its understanding of three factors:


  • what constitutes a prudent decision-making process;

  • how the process should be communicated; and

  • why the process increases the capacity to build trust.


A Neuro-Fiduciary framework is best expressed in three dimensions, as illustrated in Fig. 1.

Fig. 1: Neuro-Fiduciary Framework


F1

  • Governance is the x-axis – the fiduciary’s ability to manage the details of a prudent decision-making process.

  • Stewardship is the y-axis – the fiduciary’s passion and discipline to judge wisely and objectively.

  • Leadership is the z-axis – the fiduciary’s capacity to inspire, engage and serve others.


To build trust, you have to develop a client relationship along all three axes. Like the legs of a three-legged stool, there can’t be a shortfall along any one axis.

There also is a sequence in the order that trust is established. You must first demonstrate your ability to manage a prudent decision-making process – good governance. Only then will clients begin to consider your stewardship, and then your leadership capacity. (See Fig. 2.)

Fig. 2: Trust and Loyalty: Requirements and Sequence


F2

The Neuro-Fiduciary three-dimensional model also is helpful in illustrating that there are considerable challenges to preparing an advisor or broker to serve in a fiduciary capacity. This is another problem we have with the DOL — it wants to make everyone a fiduciary. Advisors and brokers are being pressed into fiduciary service even when they lack the training and experience to manage a prudent decision-making process, or don’t have the inclination or desire to serve as an investment steward.

To this same three-dimensional model we can add the existing regulatory standards of care, as illustrated in Fig. 3.

Fig. 3: Regulatory Standards of Care


F3

There are several advantages to viewing the regulatory standards in three dimensions. First, it shows that a suitability standard is not the opposite of a best-interests standard — rather, the two fall along a continuum. This helps to explain why the vast majority of investors are not able to discern the differences between a suitability standard and a best-interests standard. And when the differences are explained, investors say they still don’t care. What they care about is whether they can trust their broker or advisor – hence our focus on building trust.

Second, the DOL rulemaking is having the effect of minimizing ERISA’s long-standing procedural prudence standard. A procedural prudence standard requires a fiduciary to not only act in the best interests of a client, but also to demonstrate the details of their decision-making process. A procedural prudence standard defines a higher standard of care than a best-interests standard. The DOL’s rules are based on a best-interests standard, not a procedural prudence standard, and therefore they represent a giant step backwards.

Conclusion

The French sociologist Emile Durkheim (1858-1917), is credited with saying: “When mores [customs and behavior] are sufficient, laws are unnecessary; when mores are insufficient, laws are unenforceable.”

Whether or not the DOL’s rules become applicable in 2017, we have to fix the numerous problems caused by the regulator and its misinformed advocates. If we don’t define the appropriate “mores” for advisors and brokers, regulators will. And, as we have seen with the DOL, we’re never going to be happy with the rulemaking of regulators.



Click here to read more commentary from Don Trone, and here to view this column as a pdf.



Our profession needs to assume the leadership role in defining a uniform standard of care. Such a standard should require all who provide investment advice to demonstrate their:


  • governance — the details of their decision-making process;

  • stewardship — the capacity to judge wisely and objectively; and

  • leadership — the ability to inspire, engage and serve others.


A Neuro-Fiduciary framework provides the metrics for constructing a uniform standard. It also can be used to illustrate the process for restoring and rebuilding investor trust in our industry.

©2017, 3ethos, Inc. Used by permission.

Donald B. Trone, GFS is the CEO and one of five co-founders of 3ethos. This column first appeared in the Spring 2017 issue of NAPA Net the Magazine. Opinions expressed by the author are not necessarily those of NAPA or its members.

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