You don’t necessarily have to call yourself one in order to act like one
by Herbert Daroff, JD, CFP Mr. Daroff is affiliated with Baystate Financial Planning, Boston. He is a contributing editor to Life & Health Advisor Magazine. Connect with him through e-mail: [email protected]
Are you a “Fiduciary”? Regardless of your answer, should you be performing under a fiduciary standard of care?
My professional designations, licenses, and personal moral code of ethical conduct causes me to look at a client’s goals, needs, and objectives before being concerned about my own or those of any insurance or investment company that I may represent.
But, am I a fiduciary? Is acting as a fiduciary the same as ethical conduct?
Let’s look at ETHICS:
- E = education (college, continuing, and knowledge of the client’s goals, needs, objectives, risk tolerance, time horizon, family, assets, etc.)
- T = transparency (disclosure of process, preferences, conflicts of interest, and compensation model, including incentives)
- H = honesty (truthful, to yourself, your partners, staff, and clients — telling clients what they need to hear even if it is not what they want to hear, “what you say”)
- I = integrity (how others judge your conduct for being consistent and accurate, your principles, “what you do”)
- C = competence in the specialties needed for the client’s situation or partner with those that have those competencies that I may lack
- S = suitability (reasonable grounds for believing a recommendation fits the client’s best interests based on the client’s goals, needs, objectives, etc. within the scope of the engagement)
Is there a difference between “suitability” and “fiduciary standard of care”? Should the standard be “what’s in the best interest of the client”?
A trustee is a fiduciary; an individual or enterprise to whom property is entrusted for the benefit of another. Most insurance agents and registered representatives of most, if not all, broker-dealers are prohibited from being a client’s trustee. There are exceptions for family and under other very narrow circumstances.
Or is it just a ruse…
So, is the whole “fiduciary” issue just another ruse by the “fee-only” registered investment advisor (RIA) folks who can be trustees against the “fee and commission” or “commission only” advisors who are registered reps and cannot be trustees?
CFP Board created practice standards for the six step financial planning process. Disclosure: I was a member of its initial Board of Practice Standards. The client and the advisor mutually define the scope of the engagement, which may include all six steps, but may, for example, not include implementation and/or monitoring.
The advisor gathers sufficient objective and subjective information about the client to properly address that scope The advisor evaluates the collected information and develops alternative solutions that are appropriate for that client’s situation (SUITABILITY).
The advisor makes specific recommendations to the client in a manner consistent with CFP Board’s Code of Professional Conduct (CLIENT’S BEST INTERESTS).
The advisor implements the agreed upon recommendations, working with the client’s other professional advisors (e.g., attorney, accountant, etc.) The advisor monitors the implemented plan based on the changes that occur in tax law, the client’s financial situation, and the client’s family situation.
Since I helped write these standards, I believe strongly in them. I also feel strongly about all six components in my ETHICS acronym, above.
“A rose by any other name would smell as sweet,” is a frequently misquoted statement from Shakespeare’s Romeo and Juliet, Act II, Scene II. Juliet said, “What’s in a name? that which we call a rose by any other name would smell as sweet” Do I have to call myself a “fiduciary” in order to act as one?
I am so tired about the terminology battles:
- I am a financial planner. I don’t need adjectives like “financial life planner”.
- I provide financial plans for my clients. They don’t need to be “comprehensive” financial plans or “coordinated” financial plans.
- My compensation comes from fees and commissions. My clients have a choice. My wife cares how I get paid. My clients only care that I am competent and capable of helping them solve their financial concerns in a tax efficient and cost effective manner, keeping their best interests paramount and implementing only suitable planning recommendations and financial products.
- I am a life insurance agent
- I am a registered representative with an insurance company based broker-dealer
- I am a registered investment advisor
- I am an investment advisor representative
- I am an attorney
- I am a CFP® professional Is financial planning a “profession” or an “industry”? I don’t care. Neither do my clients.
So, Am I a Fiduciary?
I have no idea. Some regulatory agency will tell me:
- IRS = Internal Revenue Service,
- DOL = Department of Labor,
- SEC = Securities and Exchange Commission,
- FTC = Federal Trade Commission,
- FINRA = Financial Industry Regulatory Authority,
- CFP Board,
- NAIC = National Association of (State) Insurance Commissioners and/or individual state Insurance Commissioners
- Secretaries of State (Securities Division) and/or Attorneys General of individual states
Or, some court will tell me. Some set of facts presented to some court of law may create a “fiduciary standard” for what we do and/or the label “fiduciary” for who we are. Or, Congress or some state’s legislature will tell me. Non-regulatory associations represent large groups of us.
- FPA = Financial Planning Association,
- Society of FSP = Financial Service Professionals,
- NAIFA = National Association of Insurance and Financial Advisors
- Estate (and Business) Planning Councils,
Please join these organizations. Please let them know how you feel. Please play an active role in the debate. Or better yet, get all of these folks to stop spending so much time on semantics and distracting us from what we need to be doing, which is allowing us to focus our time and efforts on helping our clients with the financial concerns that keep them up at night, such as:
- covering the increasing costs of health care and custodial care, especially after they leave their primary occupation (retired, or re-hired),
- running out of income before they run out of breath, • helping their children and grandchildren pay off their student loans,
- transferring or selling their family-owned or privately-held business or professional practice,