Shoot The Fiduciary Messenger? Or Use The Debate To Spark Propitious Thinking...

Tuesday, March 13, 2012 07:54
Shoot The Fiduciary Messenger? Or Use The Debate To Spark Propitious Thinking...

Tags: compliance | Congress | Dodd-Frank | fiduciaries | investment fiduciaries

The fiduciary debate is reopening a deep schism that has divided independent financial advisors for decades. Rather than fuel the controversy, the purpose of this post is to open an ongoing professional discussion. This will become a Tuesday series exploring all sides of the fiduciary issue affecting financial advice professionals. 

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The best place to start is by defining the term fiduciary, then discussing how the definition changes in different engagements. Of course, this is currently the source of a brouhaha. The simmering controversy stems from the effort to create a single fiduciary standard which applies to both fee-only advisors and commission-based brokers.The SEC is bringing it to boil with its desire to impose the Investment Advisers Act of 1940 as the across-the-board standard.
But the principles inherent in being a fiduciary are getting lost in the SEC’s rush to get something on the books and exonerate itself for lapses that culminated in the 2008 Wall Street crisis. The focus is drifting away from the principle intent of the concept. It’s becoming mired in the semantics of establishing a rule. Fortunately, advisors still have time to offer commentary.
What should that commentary be? What should be its purpose?
Rather than continue the argument between investment advisors and brokers, we should refocus on the principles of the fiduciary definition and on applying those principles in properly serving clients.
According to Don Trone, founder of 3ethos and creator of the Global Fiduciary Strategist (GFS) designation, the current legal definition of a fiduciary is “someone who accepts legal responsibility in managing the assets for another.” 
A fiduciary is defined by as “a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith, and honesty.”
The Department of Labor says that using discretion “in administering and managing a [retirement] plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.” That “person” can be an administrative committee or a company’s board of directors.
Suffolk University of Law Professor Charles Rounds, a recognized and practicing authority who has written and taught on the fiduciary liabilities of trustees and agents for 35 years cites that a fiduciary functions with “undivided loyalty.”
As is shown from these differing definitations, the concept of functioning in a fiduciary capacity has a much broader reach than you might think. It seems appropriate, then, to say that although there is a current legal definition, the term “fiduciary” is defined in multiple ways based on the situational view of what constitutes fiduciary duty and how the principle of being a fiduciary is applied in practice.
Some may say that a fiduciary is designated by someone who earns fees for advising on assets. A reasonable application of the principles illustrated above shows how quickly and easily this delineation falls short. There may be times when a client with smaller assets does not trade as much as a client with larger assets. In such a case, commission-based compensation may be the most economical way to charge for that service. The case may be made simply by keeping records year over year, comparing commission costs for that client against the costs of an assets-based fee program.
Since evidence can be produced that an advisor is acting purely on behalf of a client's best interests, does it really make sense to pronounce that an advisor is a fiduciary based on charging fees versus commissions? Accountability of actions seems more in keeping with the spirit of the definition and also with the law as practical and professorial authority Charles Rounds applies it.
I have my own definition of a fiduciary, by the way: A fiduciary is a person or entity who acts in a trust relationship on behalf of another for another’s wellbeing, taking into account all aspects contributing to that state of wellbeing.
What is your definition of a fiduciary? How should the duties of a fiduciary be carried out?
I look forward to your comments and carrying on this discussion.


Comments (2)

barry korb
I agree that it is important to ensure that what ever fiduciary standard emerges should include an an "overiding principle of duty" that can be used both to defend an advisor against attack for failure to do specific things AND to penalize an advisor for not acting in a clients best interests even if said advisor has followed some set of formal or informal 'safe harbor' rules. I have been in the regulatory business long enough to know that with out the overiding principle any set of rules/'safe harbors' can be abused. Focus on rules leads to the absurdity that broker suitability rules can be (and have been) defined as safe harbors for advisors! Barry Korb ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )
barry korb , March 18, 2012
Great point about rules vs. principles, Barry. A discussion of the 'safe harbor' aspect is coming soon. In my view, application of the principles is a much truer measure of being a fiduciary rather than just abiding by a set of rules and for the very reasons you stated. This fuels a more robust view of being a fiduciary which I think is appropriate. More discussions to come! Thanks for your comment.
lisagray , March 19, 2012

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