This question has been dogging me for some time: What, exactly, does fiduciary advisor mean? Sure, advisors, as opposed to brokers, have a fiduciary duty to their clients–which means putting their clients’ best interest ahead of their own–but how can an advisor know for sure if he’s fulfilling his fiduciary obligations? Are there any real guidelines?
ERISA requires advisors to adhere to a set of fiduciary standards, as does the Pension Protection Act with its fiduciary advisor designation, but how can an advisor be clear about all of his fiduciary duties? To get an answer to my question (and assurance that I’m not the only one who’s confused) I spoke at length with Stephen Winks, chairman of the Fiduciary Standards Council, and he assured me that there is indeed “a great deal of confusion” among advisors as to what the Investment Advisers of Act of 1940 says regarding fiduciary duties. He also says advisors confuse fiduciary standards in the ’40 Act with those set out in the Uniform Prudent Investor Act (UPIA), ERISA, and The Uniform Management of Institutional Funds Act (UMIFA). “The industry has positioned advisors/brokers as salesmen of advisory products, but there is a different fiduciary duty for a money manager who can’t deal with client-specific issues, versus an advisor who must deal with client-specific issues,” says Winks, former head of the investment management consulting business for Prudential Securities. “What we find today is brokers and advisors are selling advice products thinking that by virtue of the sponsors of those products fulfilling their fiduciary duties that they are fulfilling theirs–that could not be further from the truth.”
Some advisors mistakenly believe that good intentions are enough to fulfill their fiduciary duties, Winks says, but “there are very specific things required” when acting in a fiduciary capacity. That’s why the Fiduciary Standards Council is now working on an audited prudent investment process that will provide advisors with “a safe business environment in which all advisors can acknowledge and fulfill their fiduciary obligations.” Winks says the Fiduciary Standards Council is in early talks with SIFMA to use its audited prudent investment process.
“We have to find a way to reconcile commission sales (no advice) with financial planning (needs-based selling) with investment management consulting (advice as a product) with fiduciary counsel (advice as a process you manage),” Winks says.
Why is there confusion among advisors about their fiduciary obligations?
The brokerage industry, in essence, is trying to make advice a product and they have literally structured advice as a product. Under the ’40 Act (both the Investment Advisers Act and the Investment Company Act), if you are a money manager you have certain obligations to the consumer but basically the ’40 Act is an anti-fraud rule. But by virtue of those investment management programs being structured as ’40 Act products, the sponsor is fulfilling their fiduciary obligation to the consumer, but the advisor has a whole different set of fiduciary obligations that are not covered by the sponsor fulfilling their obligation as the money manager. For example, transparency, full disclosure, pricing, all of those issues are not subject to any diligence on the part of the money manager–the money manager has a product that they sell and they are certainly at no obligation to explain what other money managers doing similar things charge for their services. But money managers do have a basic duty not to defraud investors.
The Uniform Prudent Investors Act (UPIA), ERISA, and UMIFA all entail very practical guidance for advisors and establishing what their fiduciary obligations are.
What’s happening is now you have to disclose whether you are acting in a fiduciary capacity under the Merrill rule–whether you’re broker or advisor or financial planner. Financial planners think of themselves as acting in a fiduciary capacity, but in truth, if you’re selling an advice product, you’re acting in a sales capacity, thus the confusion. Because Merrill Lynch has an advice product and they are fulfilling their fiduciary obligation, that’s a different obligation than an advisor has to the client–advisors have to be transparent and act in the client’s best interest whereas a money manager must stick to what they say in the prospectus or offering document.
The Rand Report confirmed that investors are confused about brokers and advisors. The Rand Report is disappointing because it didn’t address any of the important questions. The [first] important question is: Is a broker selling an advice product acting in a fiduciary capacity?