When making investment decisions, Americans come across plenty of unfamiliar terms and murky concepts. In addition to the investments themselves, the financial services industry is replete with its own vernacular and jargon.
One word that’s bandied about is “fiduciary.” A fiduciary manages another party’s assets and has a legal and ethical obligation to put the other party’s interests first. For a financial advisor, that means helping a client make decisions in his best interest, even if it means reduced compensation — or no compensation — for the advisor.
For clients, that distinction can be confusing. Not all advisors are fiduciaries, and it’s not necessarily clear whether any given advisor is or not. In addition, the alphabet soup of financial-industry credentials often leads investors to believe a person with a string of letters after his or her name is a fiduciary. That’s not always the case.
Asset-management firm CLS Investments and compliance consulting firm MarketCounsel recently surveyed 200 independent financial advisors about the fiduciary standard. It asked about advisors’ own perceptions of the term, whether they considered it worthwhile to describe themselves to clients as fiduciaries and whether the term should be applied uniformly throughout the industry.
The findings revealed some rifts among advisors in how they perceive and apply the fiduciary standard.
— Eighty percent of advisors consider themselves to be fiduciaries.
— Nearly 37 percent of respondents consider the term to be meaningless, given a lack of understanding of a fiduciary’s function.
— Eighty-three percent of respondents who identify as fiduciaries completely or partly disagree with the statement, “Fiduciary oversight is applied consistently throughout my organization.”
— Nearly 70 percent of all respondents say being a fiduciary is not determined by how an advisor is compensated, nor how the standard of care is disclosed.
— Seventy-five percent say acting solely in a client’s best interest defines a fiduciary.
While advisors may disagree on many aspects of the term’s definition or application, most understand that the fiduciary standard requires them to act in clients’ best interests.
Getting that across to clients is key.
Jennifer Cagle, a certified financial planner and senior managing director at First Foundation Advisors in Irvine, California, says she always explains the fiduciary standard to clients.
“I try to discuss it at my first meeting with a prospective client, given that so few clients truly understand what it means: to act in the client’s best interest, and to put their needs and objectives before those of our company.”
Cagle says that adhering to this standard means avoiding any conflicts of interest, usually around fees. “If they arise, we need to disclose those conflicts immediately. Transparency is key. This also, perhaps most importantly, requires us to monitor our client’s changing financial picture and adjust their investment portfolio accordingly.”
As a client’s situation changes, an advisor with a fiduciary duty is obligated to make any necessary changes in the client’s plan and investment portfolio.
Mark Hebner, president and founder if Index Fund Advisors in Irvine, California, says most investors are familiar with the term “fiduciary,” although they may lack a clear understanding of its meaning as it applies to an investment advisor.
“I started Index Fund Advisors because I was led astray by someone who wasn’t a fiduciary,” he says. “And even though the word has grown more ubiquitous, that has actually added to the confusion, not minimized it.”
Hebner’s firm, like First Foundation, takes pains to educate clients about its legal obligation as a fiduciary.
“This obligation extends to all aspects of our business and not just investment recommendations. We feel so strongly about the importance of our fiduciary duty that we added ‘Fiduciary Wealth Services’ as the tagline to our corporate logo,” he says.
Hebner shows clients the comparisons and contrasts the fiduciary standard at his firm with the suitability standard that broker dealers use.
The suitability standard, while less stringent, offers clients legal protections against dishonest and unethical brokers. However, a broker following the suitability standard is free to invest client assets in financial products that generate the highest commissions without necessarily disclosing that to the client. A fiduciary in the same situation would be required to invest a client’s assets in the most appropriate way, given the client’s age, risk tolerance and investment objectives, even if the best course of action results in a lower payout for the advisor.
“Often clients are surprised to learn that advisors at broker dealers can make recommendations deemed suitable for a client even if the recommendation may not be in the client’s best interest,” Hebner says.
Despite growing attention to the fiduciary standard, many investors still maintain that the relationship with an advisor they trust and like is more important than which standard he or she follows.
“Some will say that their relationship with their client is more important than any label, which could be accurate for the true ethical professional,” Cagle says. “However, we live in a post-Bernie Madoff world. Madoff had great relationships with his clients, but that did not guarantee that he was doing what was best for them. Most clients do feel more reassured when they understand what a fiduciary means and helps further place me in a high level of trust and confidence by my clients.”
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What Exactly Is a Fiduciary? originally appeared on usnews.com
