A Primer on What a Fiduciary Shouldn’t Do

Asset managers, beware: Rep. Bill Huizenga, chairman of the House Financial Services Subcommittee on Oversight, has sent letters of inquiry to BlackRock, Vanguard, State Street, Fidelity and other firms before hearings scheduled for the fall on what it means to be a fiduciary. “The lack of transparency surrounding the decisions asset managers make on behalf of millions of retail investors is concerning,” he warns. “Congress must understand how asset managers fulfill their fiduciary responsibilities to prioritize financial returns and act in shareholders’ best interest.”

His committee likely will be deluged with legalese and financial gibberish to the effect that the asset management business is much more complex than mere mortals could ever possibly comprehend.

For starters, different investors have different objectives and constraints—and there sure are a lot of different investors. On top of this, markets are hard to figure out. They go up and down, often more than common folks expect. Due to these vagaries, highly leveraged products make sense for some clients, while complex funds driven by arcane algorithms are the best fit for others. All responding managers will claim broad consumer choice is a social good and that they must offer a wide selection of products with an even wider set of fee structures to meet clients’ evolving needs and goals.

Some clients choose to use Catholic or other social screens in addition to maximizing their returns. Does Congress dare think Catholics should be forced to compromise their principles? A growing number of mostly younger investors want their investments to “do well and do good.” This means, in addition to beating the market, their investments are expected to benefit the least fortunate and stop raising the planet’s temperature. Immediately. The idealism of these many young and other inexperienced investors’ wishes has led hundreds of managers to offer trillions of dollars of ESG products.

Don’t buy any of it. The asset-management industry thrives on two variables: margins and volumes. Its executives grow downright giddy when they can get both. Given an opportunity to sell plain vanilla index funds for a single basis point or more pricey ESG products that may or may not perform as hoped—well, need I say more?

Given that it will prove impossible for asset managers to explain succinctly how they pursue financial returns and operate in their clients’ best interest, here are tips for Mr. Huizenga and his colleagues about how fiduciaries don’t act.

No fiduciary allows clients to invest hard-earned money for unreasonable goals. No fiduciary allows clients to buy more expensive or riskier products when simpler, cheaper alternatives will do. No fiduciary hides costs or risks from clients. No fiduciary tires of listening to clients’ objectives, even as markets and individual circumstances change. No fiduciary ceases educating clients about how others in similar circumstances have fared using different investing approaches.

Complete transparency with clients is a hallmark of true fiduciaries. That includes how a firm’s stewardship team will vote clients’ shares, which are owned by clients, not asset managers. This means clients’ voices must be heard in boardrooms and during proxy fights—not the voices of their managers, who often have competing agendas. Almost invariably, asset owners want to maximize their long-run financial interests. More often than not, they don’t want their investments spent on politics.

“In investing, you get what you don’t pay for,” John Bogle once wrote. “Intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and simply stay the course. They won’t be foolish enough to think that they can consistently outsmart the market.”

Mr. Bogle died in 2019, so Mr. Huizenga can’t call on him to testify this fall. Still, let’s hope his common-sense wisdom will prevail.

Mr. Keeley is CEO of 1PointSix LLC and author of “Sustainable: Moving Beyond ESG to Impact Investing.”