From the March 2007 issue of Wealth Manager Web • Subscribe!

Fiduciary Facts

Many years ago, an attorney proposed what is perhaps the most succinct understanding of the term fiduciary that I have ever encountered. He said, simply, that being a fiduciary gives someone the legal right to trust you. Those are powerful words.

When all is said and done, I cannot think of any valid reason why an investor seeking advice would go to anyone other than someone who grants them this "legal right." To me, it's a no-brainer. It's as if a car salesman asked you whether--for the same price--you would rather have the same car with a warranty or without one.

I was delighted when I first learned of NAPFA's campaign to educate the consumer about what a fiduciary standard is and the reasons why they should use someone who is a fiduciary for all their planning and investment needs. The association's Focus on the Fiduciary held promise.

NAPFA noted that "A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest."

But I was startled when they went on to say that CPAs, attorneys and doctors are fiduciaries--a statement that is blatantly incorrect. Of the three, only attorneys are fiduciaries by statute. Doctors have a high standard of care with their own professional hurdles to meet. A simple call to the AICPA asking if CPAs are fiduciaries yielded an immediate "no."

When it comes to such an important issue, one would expect facts to be checked and double-checked. After all, NAPFA is asking the public to trust them to be their educator. How many "facts" can you get wrong before your credibility is seriously diminished?

Granted, the issue of who is and who isn't a fiduciary is complicated. The Investment Advisers Act of 1940 requires that registered investment advisors be held to a fiduciary standard--but does not define fiduciary. The Act calls for registration by anyone holding themselves out as an investment advisor and offering advice on securities for a fee. If Congress had stopped right there, life would be easier. Instead, they decided to grant exemptions to certain occupations--among them any lawyer, accountant, engineer, or teacher whose performance of such services is solely incidental to the practice of his profession; any broker or dealer whose performance of such services is solely incidental to the conduct of his business as a broker or dealer and who therefore receives no special compensation; the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation.

But the word "incidental" has not been defined, either, and that seems to lead to even more confusion. (We can tolerate the need for free speech and will ignore the exemption to publishers.)

Back in 1940, the distinction may not have mattered much because few people had stock brokers and Registered Investment Advisors were firms managing portfolios comprised mainly of individual securities. That is quite different from today's environment where a large portion of the population have relationships with a broker/dealer, and many RIAs are allocating assets among registered products. The forest and the trees have melded into one picture.

The issue today, then, seems to be whether the campaign to promote the benefits of dealing with a fiduciary is a wakeup call to the public on planning issues or just a revisitation of the old fees-versus-commission argument used for asset gathering.

This is important because to my knowledge, no one has suggested that the exemption for attorneys or accountants be rescinded. Yet why should the public, at a time of need, be subjected to possible poor advice from people who are not registered? We've all heard horror stories where an accountant focusing only on tax issues turns a good portfolio into trash, or an attorney looking at the face value of assets makes a judgment without proper analysis that leaves the client with a sub-par asset. If protecting the public is the primary concern, shouldn't these professionals also be prohibited from providing [financial] advice unless it is incidental in the sense of being very closely aligned to the engagement. For example, the accountant could provide alternative outcomes based on tax strategies, but not recommend the purchase or sale of securities; and the attorney allowed to give advice on the characteristics of securities, but again, not their division, purchase or sale.

Instead, the focus is on the asset gathering and not financial planning, and it comes down to that tired routine of painting the RIA as holier-than-thou. References I find particularly contemptible and old-hat appeared in recent issues of the NAPFA Advisor. Referring to an article on fiduciary behavior , NAPFA member John Ritter states that all a wholesaler needs to do is provide dinner and a lap dance, and the broker will turn around the next day and put clients' money in that product. (NAPFA Advisor, October 2006) And this remark comes at a time when NAPFA is relying more on sponsors and exhibitors to provide meals at conferences through the Dine Around concept where some 10 to 15 people are taken to dinner by a sponsor--lap dance optional! In this day and age, remarks like that are inappropriate and belittle the professionalism of brokers.

Perhaps that was just one advisor's opinion, and perhaps, just a bad choice of words. Yet the same Mr. Ritter, presenting at a NAPFA conference, advocated that if you can't say something bad about a particular broker, then bad- mouth the industry and aim for guilt by association. (NAPFA Advisor, November 2006). In my opinion, remarks like this should not be allowed at a conference and certainly not validated with CE credits.

If we are really interested in educating and protecting the public, I think it is time to stop the name calling and misleading characterizations and make the attempt to resolve the issue. First of all, everyone needs to agree on what is meant by a fiduciary standard and recognize that it is a term that affords legal protection--not a definition of a good guy or bad guy. The fiduciary standard is not a guarantee of superior investment results or financial planning. What it may provide is a legal remedy for a client who can show that his advisor did not act in his best interest or failed to disclose material facts.

The organizations leading the way in this effort are the Financial Planning Association--through the legal process--and NAPFA through its educational process.

TD Ameritrade has lent support to the effort by sponsoring polls that show Americans are hopelessly confused about the role of financial advisors and, given a choice (which they now have), would prefer to deal with a fiduciary (which, for the most part, they don't do now).

In a poll of its own, FPA found that a vast majority of its members would like to be held to a fiduciary standard. They said the results were similar whether the respondent was independent or affiliated with a broker/dealer. (Note that this question was framed in the context of the CFP Board of Standards Code of Ethics.)

The question then, is how we the public and those advisors can be satisfied; and the answer of course is to change the law. Congress barely hears the voices of the two planning organizations, but it might react differently if those 30,000 voices were multiplied by 100.

And this could be accomplished through that good old grass roots tool, the petition. If every advisor who wants to be a fiduciary gathered the signatures of their clients, such a petition could be presented to the Senate Banking Committee, the House Banking Committee and the SEC. Perhaps even a broker/dealer supportive of a change in the law could devote resources, even part of their Web site, to an electronic petition.

Of course the best result would be achieved by amending the Investment Advisers Act of 1940 to align itself more closely with the realities of today; to define financial planning and recognize it as a separate profession; and to continue to educate the public.

Morris Armstrong, CFP, ChFC, CDFA, and NAPFA-Registered Financial Advisor, owns Armstrong Financial Strategies, a fee-only financial planning and investment advisory firm in Danbury, Conn.

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