Are You a Fiduciary?

By David B. Loeper, CIMA®, CIMC®

Most financial advisors offer advisory services that cause them to have a fiduciary relationship with either some, or all of their clients. Many advisors toss this fiduciary term around in a rather cavalier manner when marketing their services for the specific purpose of trying to garner trust from the client. While it is understandable that you would want to highlight the fact that you may be a fiduciary, in a practice that is beyond reproach you also have the obligation to make sure the client understands when you are not acting as a fiduciary, or the limits to which your services apply a fiduciary standard.

While the SEC requires that your disclosure documents disclose conflicts of interest and dual registration as a securities broker or insurance agent, it is your ethical obligation (above and beyond the legal minimum) to make sure the client is not misled in your presentation. IF you highlight in your presentation that you are a fiduciary (in an attempt to earn trust), should you not ALSO highlight all of the things you do that ARE NOT fiduciary services?

Put yourself in the shoes of the client and think about what their perception would be of your content. If the conflicts of interests, limits of the fiduciary services and dual registrations (and the implications thereof) are not featured in your presentation, but the fiduciary term is, wouldn’t any reasonable person assume that you are always acting in a fiduciary capacity? Isn’t that what such a presentation implies?

For example, anyone who is compensated for services to an ERISA plan is, by definition, a fiduciary. But what type of fiduciary and for what services? Does your contract evade taking responsibility for the specific selection of funds to offer in a 401(k) plan, making the trustees ultimately accountable? Does your contract merely state that you will assist trustees in finding candidate funds for the trustees to select? Is this limitation of your fiduciary responsibility effectively communicated in your presentation about your research and selection services; or does it just say you are a fiduciary and make it incumbent on the trustees to understand that you have little real responsibility? If so, is that ethical?

Dual Registration

There has been much talk about holding brokers to a fiduciary standard on Capitol Hill in an effort to protect consumers. In fact, I think that consumers would actually be harmed more by instituting this standard. The problem isn’t that there are not fiduciary services available in the marketplace (there are thousands of SEC and state-registered investment advisers who are supposedly already held to a fiduciary standard). The problem is that consumers cannot tell the difference between a true fiduciary working solely for the client’s best interest and a conflicted one that serves two masters—the client and the product vendors that pay them. Permitting conflicted brokers to represent they are a fiduciary would make matters worse, not better. If Congress really wants to protect consumers, the only course of action would be to eliminate dual registration completely. There are too many stakeholders with strong lobbying groups to make such a system a reality, so once again the obligation to act ethically falls in no one’s lap but your own.

Regardless of the political realities of what is in the consumer’s best interest, the “beyond reproach” approach would be to make it clear whether a firm is only working for their clients’ best interest or whether the firm is serving two masters in being paid by both the client, and product vendors. This is where consumers are most confused and it is understandable that they would be. The real risk to consumers are those firms that attempt to do both and skate around the reality of the conflicts of marketing fiduciary services while also being compensated by product vendors.

If you are duly registered, ask yourself why. For example, there is no need to be licensed to earn commissions on that term life policy you sold to a client in order to serve your client’s best interest as a fiduciary. If the client indeed had a legitimate need for term life, if you were not compensated by a product vendor for writing the policy, you would objectively find a lower cost no-load insurance product. The same applies to both fixed and variable annuities. Yet how many “fee based fiduciary” advisors write policies for their clients?

If you were truly an ethical fiduciary to your clients (as your presentation may have implied), you would use the lower-cost product that was free from the burden of the commissions you could otherwise make. The fact that you are placing them in a product that pays you commissions ethically requires you to highlight this fact to the client. If you are earning a product commission for insurance, partnerships, mutual funds, etc. you have an ethical obligation to let the client know that you are conflicted in the selection of the product, that you are being paid by the product vendor, how much you are being paid in commission, and that you are NOT acting as a fiduciary in the case of this recommendation.

Does Disclosure Make You Feel Uncomfortable?

Many advisors would be uncomfortable with this sort of explicit disclosure. That begs the question: Why? We all honestly know that disclosing the conflicts, the source and size of compensation is what would be needed for any consumer to make an informed, objective judgment.   Today, there is no reason any fiduciary advisor needs to be compensated by product vendors. Those who recognize this will either ethically disclose such compensation, or will relinquish their licenses that encourage this conflict of interest with their clients. If you are uncomfortable fully disclosing this information, it is the very reason that you should make such disclosures if you truly wish to build a practice that is “beyond reproach.”

To better understand the nature and scope of the advisory services and business practices of Wealthcare Capital Management, Inc., please review our SEC Form ADV Part 2a, which is available here <http://www.wealthcarecapital.com/ruminations/WCMADV2a.pdf>. Past performance is not a guide to future returns. Before acting on any analysis, advice or recommendation in the above content, you should seek the personalized advice of legal, tax or investment professionals.  By selecting the links on this page, you may be redirected to third party websites not under the supervision of Wealthcare who may have different privacy policies than Wealthcare.

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