What does it mean when financial advisors say they are serving in a fiduciary capacity? Can they say they are fiduciaries even if they don't acknowledge it in writing? How similar are the best practices associated with a suitability standard to those of a fiduciary standard? Can an advisor who is subject to a suitability standard still offer clients a fiduciary standard of care?
For the past several months, Warren Cormier of the Boston Research Group and Mike Vien of Wipro have been working with me on the design and implementation of an annual fiduciary impact survey. Together, we formed a blue-ribbon panel of industry experts to help us draft the appropriate questions. We pulled experts from both ends of the fiduciary debate, and even several from the middle. Almost all of them said that our biggest challenge would be to define what it means to be a fiduciary. The questions at the beginning of this article were just some of those raised by our panelists.
When we asked what it means to be a fiduciary, we started with the legal definition: somebody who accepts legal responsibility for managing another person's assets. The problem with this one-dimensional definition is that some advisors are willing to accept that responsibility but still lack the experience, knowledge and training to follow through. Conversely, the definition excludes those financial advisors who have the skills but aren't allowed to acknowledge fiduciary status in writing.
Our next step was to take a two-dimensional approach-to start with a legal analysis and then examine the financial advisor's process. "You're willing to sign a document that states you're a duck; now show us that you can walk like a duck." This is an improvement, but now our shortcoming is that we are not capturing the "attitude" advisors have toward their clients. We are not illuminating their business principles. Unfortunately, some advisors are willing to acknowledge a fiduciary status in writing and have all the accoutrements of a fiduciary process, but they are dishonest in their business dealings.
We came to the conclusion that the term "fiduciary" needs to be defined in three dimensions that can be measured: from a legal standpoint, from a behavioral standpoint and from a standpoint of principles. We could then measure each of these items on a three-dimensional graph according to the ways advisors describe their practices. Such an approach would enable us to accurately triangulate an advisor's point of reference. Once the survey is administered, we would be able to get a sense of how the industry, as a whole, views and uses the term, "fiduciary." (The plot of all the survey respondents on three axes would likely resemble an ellipsoid-a football-shaped surface area tilted on a 45 degree angle.)
Each axis would measure the following things:
The advisor's adherence to the law and regulations: We believe the salient factors are whether the advisors acknowledge their fiduciary status in writing, whether they know the requirements associated with different fiduciary acts (such as ERISA, the Uniform Management of Public Employee Systems Act, etc.) and whether they are familiar with fiduciary case law and regulatory trends. Why are these factors important? First, fiduciaries differ from stewards, brokers and agents in that they accept legal responsibility. It's prudent to reduce such agreements to writing. Second, there is a legal requirement for fiduciaries to demonstrate their procedural prudence-the details of their decision-making process (our second axis or dimension). Many industry best practices, such as the evaluation of a money manager against a peer group, have their origins in regulatory opinion letters and case law. Third, most advisors are also advising trustees of personal trusts or investment committees for retirement plans, foundations or endowments. These clients are relying on the financial advisor for assistance in managing their own fiduciary roles and responsibilities. Therefore, it's critical for the advisor to be knowledgeable not only about fiduciary practices, but also about regulatory changes and trends in litigation.
The advisor's process (or behavior): As previously discussed, advisors serving in a fiduciary capacity are required to demonstrate their procedural prudence-the details of their investment management process. The advisor's decision-making framework (behavior) should be designed to satisfy legal and regulatory requirements. Unfortunately, there is little consensus across the industry about what constitutes a prudent investment process. There are no yardsticks that advisors can use to determine whether their practices measure up to a fiduciary standard. In fact, this is one of the objectives of the survey-to benchmark and measure best practices associated with a fiduciary standard.
The advisor's principles (or "attitude"): Marty Kurtz, a past president of the FPA and one of our panelists, said it best: "It's what's inside that counts." Unfortunately, in every profession there are people who claim to adhere to higher standards but are actually fundamentally dishonest and lack integrity. I have never found a correlation between integrity and an advisor's status-that there's more in an RIA, for instance, than in a registered rep. "Principles" and "attitude" were a major focus for many of our panelists. Just because some advisors are subject to a suitability standard and are not permitted to acknowledge fiduciary status doesn't mean they are not putting the interests of their clients first.