Are Registered Reps Capable Of Acting In A Fiduciary Manner?

Tuesday, March 20, 2012 10:34
Are Registered Reps Capable Of Acting In A Fiduciary Manner?

Tags: client education | fiduciaries | practice management | profession | regulation

The term ‘financial advisor’ is a title that remains unregulated. Most clients still have no idea what being a fiduciary means or if their advisor or rep is one. Knowing when an advisor is acting as a fiduciary and when he or she is acting in a brokerage capacity doesn’t mean a loss of that client’s business.

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It most rightly should result in stronger trust relationships and professional integrity.
The Department of Labor (DOL) wants to use data and investment return evaluation to determine fiduciary status. Assessment of fiduciary action is a principled approach rather than the definition of a word or a place of employment. This is important because the definition of this word determines the level of service a client will receive.
Take, for example, the fiduciary role of advisors. This role is often placed within the context of the firm where an advisor works. Like the DOL’s attempt to define a fiduciary in terms of data and returns assessment, this is a grossly inadequate set of criteria.
Fiduciary service to advisory clients depends upon impartiality. It involves robust and effective service. It cannot accommodate a cookie-cutter, turn-key approach to application. Such application negates the very principles behind the term.
For example, guiding a 38-year-old client in housing more aggressive investments in her IRA account may not be a breach of fiduciary duty. That will look different than being a fiduciary to a 68-year-old retired person who wishes to maximize income and capital preservation in his. Charging commissions rather than fees on an account that is fairly inactive may result in lower costs for that client. That may be what’s best for the client.
A fiduciary looks at a client's account from a 360 degree perspective. Clients trust advisors to understand that what happens in one side of their portfolio affects what happens in every other side. Clients are accustomed to choosing investments and investment vehicles in silo fashion. They may have heard a recommendation from a friend. They may be part of a peer discussion with a group of wealthy investors.
A fiduciary selects investments based on the goals the client wishes to accomplish. He or she benchmarks investment performance against the achievement of those goals, not just against an index or a customized benchmark.
This is principled application. It implies fairness, loyalty, and a high level of care. Yet there are standards which have been developed in fulfilling fiduciary duty. Standards which support principled application.
Financial institutions have been reticent to admit that registered reps operate in a fiduciary role. The Merrill Lynch rule accepted by the SEC in 2005 allowed firms to offer a broader range of services and garner a higher level of client trust. Yet each account opened carried a disclaimer noting the account was a brokerage account, not an advisory account.
When the Merrill Lynch Rule was struck down by the US Court of Appeals in 2007, large financial institutions still did not recognized their reps as fiduciaries. Not wishing to upset the lucrative model they had created, they steered clients to separate divisions to accommodate the new ruling.
Being a fiduciary is not something to be feared.Transparency about the functions of and differences between a registered rep and an advisor only build trust in the client relationship. Being held accountable within the guidelines of a specific profession should be welcomed. 
None of this means that a rep at a large financial institution is incapable of acting in a fiduciary manner. Instead, it supports standardizing fiduciary status from principled application rather than surface protection against liability. Hopefully, this is what the commentary period will push the DOL toward in its redefinition.

Comments (1)

Advisors are certainly capable of being fiduciaries. Indeed most want to do what is best for their clients. But most rely on others for their manager due diligence, and therein lies the exposure. For more details, please see "A New Era for Financial Advisors" at
ronsurz , March 24, 2012

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