Get Back to Your Fiduciary Roots, Advisors Urged

Clients value advisors who serve them as fiduciaries, but regulators and brokers are muddying the waters, panelists say.

By Ed Prince

Clients want a fiduciary standard of care from the financial professionals who serve them, but it’s getting harder for them to figure out just who the real fiduciaries are because regulators and the industry have muddied the waters.

So say financial advisors who discussed the evolving role of fiduciaries at a Sept. 20 webinar sponsored by the Institute for the Fiduciary Standard, a non-profit organization based in McLean, Va.

While clients appreciate the standard of care provided by fiduciaries — putting the client’s interests above the advisor’s — they are not always cognizant of what that standard is, the webinar panelists say. And clients don’t always grasp the distinction between advisors who are held to the fiduciary standard and others, like brokers, who must meet a less rigorous standard.

Difficult job educating clients

“The big issue here is they may or may not know what a fiduciary is or how to define it,” says Clark Blackman II, founder and CEO of Alpha Wealth Strategies, Cypress, Texas. “They’re expecting someone to act like a fiduciary whether they know the word or not, and therein lies part of the problem. When you’re not a fiduciary, and you’re believed to be a fiduciary, then that’s a prescription for trouble, because there’s a level of trust there,” he says, adding that explaining the fiduciary role to clients can be difficult.

“Try to explain to them this industry and how some of the advisors are fiduciary and some advisors are not … It is not so easy. It is not possible, in their mind, that regulators would allow people who call themselves that same thing to have different levels of behavior. I’ve had this conversation with them. It is like, I must be lying to them. It can’t be true.”

Part of the problem is there are different definitions and standards of fiduciary duty, says James Lee, president of the Financial Planning Association, who participated in the webinar and spoke in an interview afterward.

“Fiduciary is a legal term in some ways,” says Lee, who is also the founder and president of Lee Investment Management, Saratoga Springs, N.Y. “And it is confusing to consumers because there are various definitions of fiduciary that are applied by different regulatory bodies, different certifying bodies. So, the SEC has one definition of fiduciary, the Department of Labor has another, and, of course, the CFP Board has its own definition of fiduciary.”

Regulators, broker industry ‘muddy the waters’

Worse, federal regulators and the financial industry have blurred the distinction between financial advisors who are fiduciaries, and brokers, who are not, says Knut A. Rostad, co-founder and president of the Institute for the Fiduciary Standard, and organizer of the webinar. Rostad, who was unable to speak during the webinar because of a technical issue, made the claim in an interview afterward.

Rostad says the SEC for decades has “muddied the waters” by allowing broker-dealers to “hold out” as trusted advisers, and around 2009, the industry began a concerted push to promote that image, he says.

Making matters worse, he asserts, federal regulators in 2020 instituted “Reg BI,” or “regulation best interest,” a change in the standard of care that brokers must adhere to. Previously, brokers were required to provide service “suitable” to clients. The new standard requires brokers to act in the “best interest” of clients.

“Reg BI has made the bad situation worse by claiming that broker-dealer recommendations must meet a best interest standard,” Rostad says. “And that’s good, except that the SEC neglected to say what the best interests mean, and neglected to say how they were going to apply the best interest standard.”

“And so, what many of us said at the time was, it has no teeth, because it has no definition,” he says. “And how is a broker-dealer compliance officer supposed to know whether a recommendation is or is not in the best interest of a customer? The guidance that is provided by the SEC … I think is entirely inadequate.”

Research by the North American Securities Administrators organization found that brokers probably weren’t changing what they were doing or how they were doing it at all, Rostad says.

Firms not living up to the fiduciary standard?

On top of that, Rostad maintains that only a small fraction — 7% — of financial advisors who are required to meet the fiduciary standard of care actually do so. A survey by his organization, the Institute for the Fiduciary Standard, found that only 12% of advisor firms charge clients for financial services on a fee basis, as opposed to commission, as should be done under the fiduciary model. But among those, about half, or 7%, sell insurance on a commission basis, meaning, he maintains, that they fail to meet the fiduciary standard.

“There is a lot of a lot of publicity and a lot of forces in our industry, that are driving advisors to focus on the sales side of their business and growing and becoming more profitable,” says webinar moderator Scott McKillop, CEO of First Ascent Asset Management, Denver. “You have very few people who are banging the drum … about the fiduciary responsibilities, that … have been the more fundamental ethical principles that underlie our business,” McKillop says.

Maintain a fiduciary state of mind

So, what should financial advisors be doing? Get back to your fiduciary roots, panelists advise.

“What does it mean to be a fiduciary?” says Blackman. “In the context of what we’re talking about, I think it would be like treating your clients like they were your grandmother, whose assets you were going to inherit. … So, I think in the simplest sense, that’s what it’s about.”

“It’s a state of mind, really, rather than a set of rules or some legal obligation that you have to memorize and follow,” McKillop says. “It always makes me a little nervous when I see people talking about the legal boundaries of fiduciary responsibility, because I think you’re talking about somebody who’s not really thinking about things as a fiduciary.”

Webinar participants say they are confident that despite the “muddy waters” of regulation and industry pressure, more clients want their financial professionals to be fiduciaries.

“I think there are many ethical people who are not fiduciary, and I want to make that loud and clear. But I do think fiduciary is a different way of giving advice.”

Cheryl Holland, Abacas Planning Group

But Cheryl Holland, CFP, CFBA, founder of Abacus Planning Group, offers a cautionary note.

“I’m probably a little more pessimistic than the conversations going on. I still say that the word fiduciary has resonance in the marketplace, but it is being abused and misused in ways that are confusing to the public. So, they may be attracted to it, but are they ending up at the right place because of that? Because of the mixed messaging that the SEC I think is allowing and the broker-dealers are encouraging,” Holland says. “And I’m going to stop right here and say a big footnote. I think there are many ethical people who are not fiduciary, and I want to make that loud and clear.

“But I do think fiduciary is a different way of giving advice … I’m not sure we’re winning the war. We might be winning some battles, but I still worry about the war.”

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

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