Relaxing ethical standards
Imagine the following. Your doctor has two schedules of fees: a “full price” one for patients who want the doctor to prescribe medicine based purely on what’s in their best interests and a lower-cost “value plan” for those who agree that the doctor can receive money from pharma companies for prescribing their medicines. The doctor stresses that under the value plan, while her decisions may not be in your best interests, they will be “suitable” for you. In essence, your doctor is offering to “unbundle” her professional ethical obligations from the other aspects of her service – as a way of saving you money.
Or consider a similar situation involving a company. The head of procurement offers to give up any bonus if his ethical standards can be “relaxed.” Or a member of the board of directors proposes the same with respect to her fees. In both cases, they promise that they would act “suitably” in performing their duties for the company – but not necessarily in its best interests. And, while we are imagining things, how about a political leader who offers to reduce his salary in return for a diminution of his duty of loyalty to the citizenry? Would you find any of these appealing?
Yesterday, as described in this Fox News story, President Trump “signed a memorandum instructing the Labor Department to delay an Obama-era rule that requires financial professionals who charge commissions to put their clients’ best interests first when giving advice on retirement investments.” The “past administration’s ‘fiduciary rule,’ [was] aimed at blocking consultants from steering clients toward investments with higher commissions and fees that can eat away at retirement savings. The rule was to take effect in April. The financial services industry argues that the rule would limit retirees’ investment choices by forcing asset managers to steer them to low-risk options.” (Note: registered investment advisers are already covered by a best-interests standard – so the rule in question is about extending this requirement to a wide range of others who give financial advice.)
There is a technical side to this debate that I don’t have the expertise to assess. (For instance, if the proposed rule really and truly requires recommending low-risk options for all investors then it is clearly flawed.) But as someone who taught ethics in business school for many years and who studies conflicts generally this does present something of a teachable moment.
To begin, not all business relationships require a “best interests” standard. We each engage regularly in countless transactions where we are content to fend for ourselves (so long as we are not being defrauded). This is true of most things we buy. But for relationships of trust – with doctors, employees, directors … and perhaps political leaders – we do require something beyond a no-lying standard of conduct.
What are relationships of trust? To some extent they are defined by law – such as in Judge Benjamin Cardozo’s famously saying that more is required of trustees than adherence to “the morals of the marketplace.” But beyond this, I think the analysis should be functional, using two dimensions.
The first of these is the likelihood of conflict-driven behavior occurring – which, in turn, is based at least partly on the ability of participants to the transactions in question to recognize such behavior. In each of the examples above the likelihood of bad conduct seems high, either because the participants might lack necessary technical skill (in the doctor example) to identify it or because the range of conduct at issue is too broad to be efficiently monitored (as in the other examples). Investment-advisor-type relationships would seem to fit into this category, meaning the average investor doesn’t have the time or expertise to monitor her advisor. Indeed, part of the point of purchasing professional financial advice is to get the benefit of time and expertise that the average person lacks.
The second dimension is, of course, impact. To my mind, this also argues for a strong – i.e., best interests – set of ethical standards in this setting. That is, for any individual, sub-optimal investment performance could have grave consequences. And, for the nation as a whole – which will increasingly become beset by debts of various kind – the total impact of such a shortfall could exceed the (potentially very high) sum of such parts. For more on the impact that financial advisor COIs – as well as those in the healthcare, business organization and political realms – can cause see this post.