From the October 2006 issue of Wealth Manager Web • Subscribe!

Fear Factor

Fear is a powerful emotion that can be found just about anywhere when working with clients. Fear of inflation. Fear of market volatility. Fear of job loss. Those are but a few of the concerns we must deal with every day as financial planners. And very few planners I know believe that fear is helpful to the decision-making process.

Our number-one weapon against fear is not information, knowledge, or education. It is wisdom, which according to, is the "ability to discern or judge what is true, right, or lasting." If we get good information, know what to do with that information, and put that knowledge to use for our clients, we have a chance of helping them overcome their fears and make good decisions.

A root cause of client fear is being uninformed or misinformed. Financial planners themselves are not immune to fears based on an information deficit. In the financial services industry, I see a growing fear centered on the term "fiduciary." Some of the fear is justified, but much of the angst is based on being uninformed or misinformed about who is a fiduciary and what that might mean. Between the "broker/dealer rule," nuances of the recent Pension Protection Act of 2006, the CFP Board's dramatic rewrite of its Code of Ethics, and the CFP Board's gutting of their Practice Standards, there is an abundance of confusion.

Are you a fiduciary? Much of the answer depends upon your representations to the public. Generally, if you say you are a fiduciary, you probably are a fiduciary and will be held accountable to fiduciary standards. Things are less clear on the flip side. If you are silent on the fiduciary matter, if you say you are something else, or even if you say you are not a fiduciary, you may still be a fiduciary and may still be held to fiduciary standards.

This is possible because the law can impose a fiduciary standard based on the nature of the work regardless of titles, labels, contracts and disclaimers. A fiduciary relationship exists when a party with superior knowledge and information acts on behalf of one who usually does not possess such knowledge and information. The SEC has been charged with enforcing fiduciary standards on investment advisors since the Investment Adviser Act of 1940.

Since at least 1987, when the SEC released IA-1092, holding oneself out as a financial planner has triggered the need to register as an investment advisor, consequently putting the SEC's disclosure requirements and fiduciary duties into effect. Even under the flawed Broker/Dealer Rule exemption to the Adviser Act proposed by the SEC, the Commission maintains that use of the title "financial planner" continues to invoke registration.

One of the reasons for the FPA's upcoming lawsuit against the SEC is that the SEC has created a huge loophole by allowing the use of other titles and labels that sound similar to "financial planner" without the need to register. A sad irony to it all is that the Tully Report--widely cited as the genesis of the exemption--recognized the knowledge gap in its commentary.

In addition to "financial planner," titles like "financial advisor" and "wealth manager" are suggestive of a fiduciary relationship with clients. Clearly, these titles indicate superior knowledge and represent that such knowledge will be applied for the client's benefit. And then there are the advertising campaigns that clearly imply intimacy and the effectiveness of the "advisor"-client relationship. I haven't seen any ads that say "ABC Wealth Management: Not Quite As Skilled As Our Clients" or "At XYZ, Our Financial Advisors Work For Us--Not You."

I have met thousands of financial planners/advisors/consultants from all over the country and many from around the world. My impression is that those who view financial planning as the central process by which they advise their clients have little fear of fiduciary duties. Most of them view planning as a professional discipline and conduct their affairs as though they will be held to a fiduciary standard, whether or not they actually would. These people are the heart of the financial planning profession: they come from every employment model that exists, and utilize a wide variety of compensation arrangements--including commission income.

Unfortunately, many of these professionals are beginning to feel a bit uneasy. One source of their discomfort is the compliance environment. There is no doubt in my mind that the job of a compliance officer has become dramatically more complex in the last few years. The rate of issuance of new rules coupled with what seems to be rulemaking by reactionary enforcement, understandably make this a tough job. A firm's representatives and other personnel must be proactive and diligent if a compliance program is to succeed.

Another source of stress is imposed by corporate executives at various firms. Fiduciary duty involves responsibility and thus, potential liability. I certainly expect executives to be very concerned about liability. However, independent investment advisors have had all the responsibility and liability of a fiduciary for more than six decades and have still managed to grow. They manage their liability by instituting procedural prudence. Being a fiduciary does not mean you have a litigation bulls-eye tattooed to your forehead as some suggest to registered representatives.

Instead of accepting that fiduciary duty comes with the representations made to the public, executives at some firms are forcing their people to undertake all kinds of contortions to avoid responsibility through technicalities. Some are putting disclaimers on their ads that say "[our business] is not financial planning." At least one firm is instructing its reps to avoid doing more than two modules of a financial plan in a six-month period in order to keep the service from being deemed "financial planning." (The SEC, in an interpretation letter of December 16, 2005, suggested that what most practitioners would call a "modular" planning engagement would not be deemed financial planning at all.)

What is happening more and more in this effort to skirt fiduciary standards is that many firms have distilled the process and discipline of planning down to a product called a "plan." To avoid being held to a fiduciary standard, the service is limited in topic areas. Alternatively, fiduciary standards are accepted for the purpose of producing a more comprehensive plan product, but the rep is expected to switch to his non-fiduciary "hat" to implement the plan. Here is where the SEC's exemption not only fails the public and the financial planning profession; it fails the financial services industry as well.

There is a startling lack of guidance about what is expected of reps in the hat-switching process. Reps are rightly bound to their firm's processes. If your firm is playing the technicality game, you may be vulnerable. A lot of reps have tuned into this dynamic and are justifiably apprehensive and frustrated. They are frustrated that their firms don't institute prudent processes to manage the liability. After all, they hold themselves out as professionals who can guide clients through a sound decision-making process centered on the client's needs.

All this makes the recent CFP Board proposal to completely rewrite the CFP Board Code of Ethics and Practice Standards all the more disappointing. Two of the most troubling aspects of the CFP Board's revision are the process they employed to develop the proposal and the low "duty of care" contained in the "fiduciary" standard. The CFP Board's proposal was developed in a near completely closed-door process without broad stakeholder input. Even the 60-day public comment period lacked transparency, as none of the comments were made public. The CFP Board also proposed a weak definition of fiduciary--an ordinarily prudent person versus a prudent expert or prudent financial planning professional--as a default standard. And purportedly in order to accommodate non-practitioners and others, they made the standard optional for all.

While I empathize with reps stuck in an environment that impedes their ability to do their best advisory work, I remain most concerned with how the public is affected. Those that make the rules seem to have bought into the idea that conflicted advice is better than no advice, and that unless conflicts are allowed to fly under the radar, no advice will be offered. I disagree. Raise standards and the marketplace will adjust. If even the CFP Board is unwilling to hold their certificants to a proper standard in their own private disciplinary process, the public, and the financial planning profession have little chance of success.

Dan Moisand, CFP, is a principal of Spraker , Fitzgerald, Tamayo & Moisand, LLC, in Melbourne, Fla. and President of the Financial Planning Association. Editor's Note: Mr. Moisand's opinions are his own and are not to be construed as the Financial Planning Association's position.

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