As the evolution of ethics continues in the financial services profession, it has become increasingly clear that the role of fiduciary should be considered in the development and execution of procedures. The real question is how this can be done, given the current operational standards and the needs of the client.

At the most recent national conference of the Financial Planning Association, FPA Anaheim 2009, FPA leadership addressed the work currently under way with a coalition of organizations addressing the issue of regulation in general and fiduciary standards in particular. Current FPA President Richard Salmen mentioned that working as a coalition has made a difference in how government listens when all three organizations are present. Salmen went on to say that consumer protection resonates big in Washington. He also mentioned that the Obama administration is proposing the expansion of fiduciary standards to include brokers. "However, it is a huge leap to go from talking to enacting legislation," Salmen said.

And while there may not be a clear, definitive direction to this push for fiduciary standards yet, Salmen was adamant in stating that the goal of the coalition is to focus on processes across the broad plain of the planning relationship, not products. The key issue is finding a way to develop a fiduciary standard that is enforceable.

Given that the U.S. House of Representatives is doing a series of hearings on the subject with the possibility of a floor vote sometime in November 2009 (which may have already occurred by the time this column is published), the time has come for financial advisors to better understand the role of the fiduciary and to what extent this may change the operations of a financial practice. 

In the March 2008 issue of Financial Advisor, this column addressed some of the issues confronting fiduciaries on a day-to-day basis. As mentioned in that column, a fiduciary, by definition, is anyone who handles someone else's money. When you have the legal and/or moral responsibility for managing someone else's money, it is highly likely that you will be considered a "fiduciary."

Additionally, when the client is dependent upon the financial advisor's advice (whether or not the client has given discretionary authority to that advisor), the advisor is likely to be deemed a fiduciary. Such a definition would apply to the more than 5 million men and women who serve as members of investment committees for retirement plans, foundations and endowments; who serve as trustees of private trusts; and, of course, who serve as investment (financial) advisors. Advisors who provide comprehensive and continuous investment advice, no matter what the circumstances, are acting as fiduciaries.

This is by no means a new concept. Case law extends back to at least 1993: "A broker has a fiduciary duty to the client where the broker knows, or should have known, that trust has been placed with that broker." (Gouger v. Stearns, 823 F. Supp. 282, 288 (E.D. Pa. 1993.))

If we accept the fact that the label of fiduciary is likely to be affixed to most all practitioners, then understanding the responsibilities of a fiduciary is only the first step. And while the fear of yet another layer of compliance-related activities looms, there are steps that can and should be taken now to prepare for this and to minimize the impact (if any) on your financial practice.
An acceptance of established standards of care might be a good first step. The Foundation for Fiduciary Studies ( established such standards based on existing regulations and case law. These standards, while perhaps debatable in language, should form the basis of a good start in shaping the operations of your practice as it relates to fiduciary activities.

In developing standards for your practice, there are a number of issues to be addressed. First, you should state your fiduciary status in any agreement with the client, whether this is a financial plan agreement, engagement letter or something else. If you have an RIA practice, the ADV should also disclose this along with any financial plan or advice document (stated somewhere in the document). Disclosure does not end here. You should also develop disclosure statements covering methods of obtaining financial information, investment research data and/or third-party sources such as 401(k) data. In cases where third-party data is needed, you need the written permission of clients to handle their user names, passwords, etc. to obtain such data. Disclosing methods for selecting assets, investments or other products (whether sold or recommended) should be part of the fiduciary process.

Developing the procedures and workflow requirements along with the statements of disclosure can make the actual performance of these procedures more efficient and consistent throughout your firm. Ultimately, statements surrounding ethics and integrity must be matched with demonstrable activities.

Clearly, such procedures point to the fundamental role of a fiduciary as providing disclosure-full disclosure. Along these lines, a scenario was recently offered by Michael Zmistowski, RFC, a certified instructor with the International Foundation for Retirement Education (InFRE). In this scenario, he uses the analogy of a physician. The question asked of the doctor is, if you knew of a medication or procedure that would improve the health of your patient but opted not to tell the patient about it because you felt it was too expensive, would you be in violation of your oath of ethics? The same question could be posed to the financial advisor who fails to recommend an annuity (for instance) to a client because that advisor either does not work with annuities or feels that annuities in general are too expensive. Full disclosure suggests that the financial advisor disclose all applicable options to a client along with cost factors, tax ramifications, risk factors, etc. For example, financial planners have been successfully sued for revealing a shortage of life insurance coverage in a financial plan and then failing to ensure that the client obtains proper amounts of coverage (or sign a form acknowledging the refusal to obtain such coverage).

There may be solid reasons for the advisor to not recommend an annuity (or other product), but the point is that this would be disclosed to the client. Given recent events such as the Bernie Madoff scandal, financial practitioners are now charged with the responsibility of restoring public confidence in the profession. Federal regulation can only go so far in accomplishing this. Acting in the best interests of the client through a fiduciary process that focuses on the client's situation and needs in a full-disclosure environment is one powerful way to achieve this goal.

David L. Lawrence, RFC, ChFE, AIF, is a practice efficiency consultant and is president of, a practice consulting firm based in San Diego, Calif. ( The Efficient Practice offers an advisor network and a monthly newsletter.