By FPA Member Joy Slabaugh, CFP®
Last Updated: April 26, 2010
Raging in the financial services industry is a fierce debate over which financial professionals should be held to a fiduciary standard. The lack of application of this standard is impacting consumers in ways many are not aware. The fiduciary standard is a critical element of consumer protection and could be a defining moment in the relatively young industry of financial planning. When the fledgling medical profession voluntarily agreed to uphold the Hippocratic Oath almost two hundred years ago, a standard was set for ethics in medicine. A single fiduciary standard among financial professionals will strengthen consumer protection but this may be slow coming. In the meantime, consumers would be wise to learn how to protect their interests.
The most basic definition of the fiduciary standard is "putting the client's interest ahead of your own," said FPA member Eric Brotman, CFP®, with Brotman Financial Group in Timonium, Md. The Committee for the Fiduciary Standard outlines five principles of a fiduciary standard. To paraphrase, they are:
- Put the client's best interests first.
- Never mislead clients.
- Act with prudence.
- Avoid conflicts of interest.
- Disclose and manage unavoidable conflicts in the client's favor.
Brotman continues explaining his basic definition, "Every decision and every piece of advice as a fiduciary must have the client's interests first, as if you were advising yourself or your family." It may come as a shock to some consumers to realize that not all providers of financial advice and services are required to put your interests first. In fact, different subsets of the industry have very different standards.
Unlike the medical profession that requires all fields of medicine to "do no harm," the standards for financial services differ depending on practice areas. Financial service professionals are typically licensed in one or a combination of the following three registrations with each one carrying a separate standard of responsibility. An investment adviser representative is legally allowed to provide financial advice and manage money and must uphold the fiduciary standard. A registered representative is legally able to sell many types of investments to consumers and must follow the suitability standard. An insurance agent, who is also a registered representative, is legally able to sell insurance-based investments and must follow the suitability standard as well as any state insurance rules. These standards may seem minor on the surface but have very different ramifications to the consumer.
"What would be best for consumers is blanket coverage for whenever they receive financial or investment advice without exceptions, exemptions, or carve outs," says Knut Rostad, Chairman of The Committee for the Fiduciary Standard, and regulatory and compliance officer with Rembert Pendleton Jackson in Falls Church, Va. Yet current patchwork regulations do not require one standard across all types of financial services rendered. The same financial professional may legally use a different standard with the same client depending on the type of investment or service being provided. "An obvious concern is the narrow applications of when the fiduciary standard is triggered," said Rostad. "For example, if you are receiving a specific investment or financial recommendation, too bad! You may have missed the fiduciary standard! If you walk into an office and ask for advice on your financial situation, you may or may not be dealing with a professional who holds him/herself to the fiduciary standard. But if you walk into an office and ask which mutual funds you should buy, the fiduciary standard is not necessarily triggered."
Some financial service professionals, concerned about this double standard, voluntarily join associations that require upholding the fiduciary standard, regardless of what type of service is provided to clients. The Financial Planning Association requires members to use the fiduciary standard with clients. Certain types of financial certifications require holders to adhere to a fiduciary standard as well.
Despite the nuances to who is and is not legally required to use a fiduciary standard, "There is an extraordinarily simple way for consumers to ensure their adviser commits to meeting the fiduciary standard; get it in writing," says Rostad. "Those advisers who support the fiduciary standard will have no problem with the request."
Many investors work with multiple types of financial professionals. Between their insurance agent, estate planning attorney, accountant, investment adviser and financial planner, a consumer could be fielding advice from any number of professionals who all hold to differing standards. Whether you are evaluating a potential financial professional or reconsidering your current advisers, ask your financial professionals what standard they meet and to put it in writing. You don't have to wait for reform to make sure that your interests come first.
FPA member Joy Slabaugh, CFP®, is a speaker, writer and financial planner in Delmar, Del.
Securities and investment advisory services offered through H. Beck Inc. H. Beck, Inc. and EST Financial Group are not affiliated.