Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Investment VIPs

What's in a Name?

Your article was successfully shared with the contacts you provided.

Quick, define the term “fiduciary.” While financial planners of all stripes are familiar with the word, many would likely hem and haw when it comes to actually defining it, and, even worse, often refuse to admit that they’re subject to fiduciary standards.

Brokerage firms and their reps are perhaps the worst at owning up to their obligation as a fiduciary. Why? Primarily because many brokers still argue that they’re merely executing transactions for clients, and therefore shouldn’t be held responsible if clients make shoddy investment choices. But, as we’re all aware, brokerage firms are providing more comprehensive financial advice these days, and whether they like it or not, do have a fiduciary duty, even if it’s just a moral fiduciary duty.

But what about the area beyond the moral? Do advisors have a legal fiduciary duty? Congress has noticed brokers’ newfound advisory status, and is angling to mandate that brokerage firms and their registered reps be held to the same fiduciary standards as registered investment advisors, banks, and insurance companies when handling qualified retirement accounts. Section 105 of the Pension Security Act (H.R. 1000), sponsored by Rep. John Boehner (R-Ohio), chairman of the House Committee on Education and the Workforce–which passed the House May 14, and is now tied up in the Senate–requires brokers to adhere to fiduciary guidelines under the Employee Retirement Income Security Act (ERISA).

For the first time, the legislation is “going to recognize the registered rep as a prudent expert under ERISA,” says Donald Trone, president of the Foundation for Fiduciary Studies, who’s also the director of the Center of Fiduciary Studies, which offers coursework through the University of Pittsburgh. “Now, a registered rep working with a qualified retirement account will have the nearly impossible task of avoiding fiduciary status.” The legislation will also encourage 401(k) plan sponsors to hire investment advisors to provide specific investment advice to plan participants, Trone notes. “The caveat to the advice provided is that it must meet a fiduciary standard of care.”

Harold Evensky, president of Evensky, Brown & Katz in Coral Gables, Florida, says it’s about time brokers–as well as all financial advisors–are legally bound to fiduciary standards. Evensky says that “anyone providing advice to the public, and certainly those that are marketing themselves as providing advice” are deemed fiduciaries. With brokers, if they’re performing a transaction, he says, then they don’t have a fiduciary duty, “but clearly the [brokerage] business has gone well beyond [just transactions], though the responsibility has not. I think that’s unconscionable.”

Numerous courts have ruled that investment advice must meet fiduciary standards, Evensky says, but if H.R. 1000 is enacted, the term fiduciary will become much clearer. Indeed, Tom Grzymala, president and CEO of Alexandria Financial Associates in Alexandria, Virginia, says that while H.R. 1000 only requires brokers and advisors to comply with fiduciary standards under ERISA, he’s convinced that, once enacted, it will only take a few strikes of a judge’s gavel to broaden the legislation to include all types of investment accounts.

What’s holding up a Senate vote is a debate over the 401(k) advice provision within H.R. 1000 that says advisors should not have to be independent of the sponsoring organization in order to provide advice to plan participants, as long as the potential “conflict in fees are disclosed,” Trone says. There are some in the Senate who argue that an advisor should be independent of the service provider.

While it’s anyone’s guess which provisions will make it into the final bill, Trone says he’s confident that the final version will require “investment advice to meet a fiduciary standard of care.”

Defining the Term

The term “fiduciary” itself is often considered to be an obscure term. Securities and Exchange Commission-registered investment advisors are, without question, deemed to be a fiduciary, Trone says, whether they acknowledge it or not. And so are those advisors who are state-registered. But NASD-registered reps tend to have a problem with the label because they’re held to suitability standards, not fiduciary ones, under NASD regulations. Therefore, there is “massive confusion among consumers and advisors [about] the demarcation between those two parties,” Trone says. Furthermore, he says, “I’d be willing to bet that a large percentage of the arbitration cases involving brokers is based on this confusion.” NASD rules were designed to guide brokers when executing a transaction or selling an investment. But brokers are now “being encouraged to put assets under management following an investment process,” Trone says.

The NASD is well aware that there’s a problem in brokers not being held to fiduciary standards, Trone says, but the regulator has yet to come up with a remedy. That’s where H.R. 1000 and the Foundation for Fiduciary Studies come in. Trone believes H.R. 1000 is likely to have a “ripple effect” across the financial services industry, because it will require investment advice to live up to fiduciary standards. “I think that’s going to cause the industry to pause and say, ‘Have we ever defined this?’” The Foundation has offered up its own definition to clarify when a registered rep is a fiduciary: “that demarcation between executing the transaction and now serving as an advisor can be easily defined as that point when the registered rep is providing comprehensive and continuous investment advice to a client,” Trone says. The Foundation is also offering two credentials to help financial services professionals understand their fiduciary duties–the Accredited Investment Fiduciary (AIF) and the Accredited Investment Fiduciary Auditor (AIFA).

Shirking Their Duty

While serving as expert witnesses, both Evensky and Grzymala have seen their share of arbitration cases in which a brokerage firm tried to shirk its fiduciary duty. Evensky recalls a case where he testified on behalf of a disgruntled plaintiff concerning the performance of his separate accounts. The defendant, a broker/dealer, successfully argued that it was not responsible for the account’s poor performance, as the B/D “had no other duty than to ensure the [client's] orders were executed properly,” Evensky says. “Certainly that’s not the suggestion of all of the [B/D's] marketing material. I still can’t understand how [the B/D] was successful with that argument.”

Grzymala says his post-graduate degree in operations research helps him perform a “reconstructive analysis” of a client’s account when acting as an expert witness. “I take two, three, or four years of brokerage statements and see how the portfolio was invested and how the portfolio did vis-?-vis an appropriate asset allocation benchmark,” he says. In many cases, the broker/dealer and B/D reps have not followed “a defined process,” he says. “They really have no adequate understanding of the client’s goals and objectives. They have no idea about the things that we, as financial planners, learned in the CFP course,” like assessing a client’s goals, objectives, tax status, family, and so on.

Grzymala has been acting as an expert witness in securities litigation cases for a few years now, but recently received his AIFA designation from the Center for Fiduciary Studies, which Trone co-founded, and which operates in association with the University of Pittsburgh’s Katz Graduate School of Business. The AIFA gives Grzymala the power to audit brokerage and mutual fund firms’ defined benefit and qualified plans. The Center also offers the AIF designation. Both credentials teach compliance with ERISA, the Uniform Prudent Investors Act, and the Uniform Public Employee Retirement Systems Act. The shorter AIF program, which costs $1,550, and can also be taken online, is a two-and-a-half-day course that teaches investment professionals how to incorporate fiduciary standards into their practices. The AIFA ($2,900, including the first year’s annual dues of $325), a three-and-a-half-day course, also provides internal guidance for advisors, but awards them with an auditing badge as well. The two courses are also available at Stetson University in Orlando, Florida. You can get more information about the courses by logging on to the Foundation’s Web site, The Center for Fiduciary Studies has also just released a handbook, “Prudent Investment Practices,” which can be purchased through the same Web address.

The Center identified 27 prudent investment practices as set out in the three laws that meet a fiduciary standard, Trone says. “We have not invented new standards of care. All we’ve done is compiled practices that can be gleaned from existing education case law and regulatory opinion letters.” Grzymala says he’s betting “the CFP Board of Standards might very well adopt the work that has been done by the Center for Fiduciary Studies to map out a [fiduciary] placemat, and give all the investment advisors who are CFPs a guide for their investment fiduciary practices.”

Homework for Fiduciaries

The AIF and AIFA are perfect for financial professionals looking to brush up on their legal requirements as fiduciaries. Such homework is particularly important now, as corporate scandals and unstable markets have created skeptical consumers. “Two to three years ago, if you were to mention fiduciary responsibility in the mainstream media, people wouldn’t know what you’re talking about,” says Richard Lynch, executive director of the Foundation for Fiduciary Studies. “That’s not necessarily the case now.” Professionals from all walks of life are signing up for the courses–lawyers, CPAs, advisors, and broker/dealers. “Some B/Ds are putting their top producers through the training program,” Trone says.

Financial professionals can also come away from the courses armed with credentials to help them win new business. Once H.R. 1000 passes, says Lynch, “lots of folks out there [will be] vying for that additional business to provide advice to [401(k)] plan participants.” These credentials will surely give them a leg up. And since investors are saying: “If you want to handle my money, then you show me the specific standard of care I can hold you to,” Trone notes, “that’s resonating true with even the most stalwart brokers.”

In today’s litigious society, Grzymala believes that being an expert witness is a great way to establish a competitive niche. And the AIFA designation only helps further that goal, because while it provides education on fiduciary compliance with retirement accounts, the coursework’s principles are applicable to investment fiduciary practices in general, he says.

Keep your eyes on H.R. 1000. No matter how the final bill takes shape, it’s sure to require financial services professionals to be ever more mindful of their fiduciary duties.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.